Within Warren Buffet’s annual shareholder letter in 2021, the phrase “Never Bet Against America” boasted of his collection of American-owned companies which continued to show remarkable resilience as the world began its recovery from COVID lockdowns. It was a simple, yet obvious, addendum, not unlike his many investment philosophies we’ve become accustomed to through the years. And while much of the focus was on Berkshire Hathaway’s American-dominant portfolio, at the core of the statement was the inevitability of the American consumer. As we close out the second quarter of 2024, these words still ring true.

Ten months have passed since the Federal Reserve’s last rate hike, a journey that began on March 17, 2022. Jerome Powell’s battle with inflation would consist of 11 rate hikes and a process of reducing Treasury holdings by more than $1.5 trillion. These actions would provide the sharpest rate increase since the 1980s, and a shock to a system which had been accustomed to near zero rates for almost 15 years.

James Fereday
Chief Investment Officer

The cost of borrowing wasn’t the only culprit consumers had to face. Lingering COVID lockdowns continued to be the largest wrench in supply chains across the world, which seemed to give all companies – whether they produce shampoo or hamburgers – the greenlight to increase prices until the consumer balked. With the average mortgage payment and the typical grocery bill increasing 96% and 25%, respectively, since 2020, economists began to increase the odds that a recession was on the way, and the term “Hard Landing” was mentioned hourly on your favorite financial news network. But as months, and eventually years, would go by, retail sales continued to increase, household debt-to-income ratios would match levels consistently seen in the 2010s, 401(k) savings rates would hit record levels, and wage growth would remain a full percentage point above pre-COVID levels. While some splinters are visible, such as an increase in credit card debt, the American consumer has hardly flinched and continues to be the leading tailwind for the economy and markets around the world.

During the quarter, this tailwind would help propel the S&P 500 and NASDAQ indices to returns of 4.28% and 8.04%, now standing at 15.29% and 17.47% year-to-date, respectively. As we entered the year, it was the six expected rate cuts which were thought to lead the markets to positive returns. Due to elevated Consumer Price Index levels and a consistently hot jobs market, the Federal Reserve refrained from fanning the flames, and decided to keep rates “higher for longer,” another phrase of which we’ve become accustomed. Instead, it’s been company earnings (up 6% during the quarter), a strong jobs market (747,000 jobs added along with a 4% unemployment rate), and Purchasing Manager Index numbers which point to an economy that’s still expanding. While we experienced a time when “good news was bad news”, or the result of positive economy data points increasing the odds of a rate hike, the current state of the economy and the consumer have been too much for markets to ignore, and with that, these positive indicators have driven a market to outperform nearly all expectations in the past 18 months.

John Wickliffe
Portfolio Manager

Outside of the equities market, fixed income markets have performed as expected. While rates and yields move inversely of one another, the elevated and stagnant Fed Funds rate has provided a Barclays Aggregate Index return of +0.48% for the quarter and a year-to-date return of -1.20%. Reflecting on the past three years, a total return of -8.0% has continued to provide an attractive entry point for fixed income buyers, especially as rate cuts may be on the horizon.

As we enter the second half of 2024, multiple headwinds remain in play. Geopolitical unrest in the Middle East and Ukraine offers increased risk among food and energy prices. China’s gradual economic recovery, slowed by a housing crisis not seen since 2008, continues to stall global growth. And of course, the U.S. Presidential Election and the economic policies that may follow given results within the House and Senate. So far, these events have largely been ignored, as oil prices have decreased 1.44% year-to-date since the start of the Israel-Hamas conflict and growth within the United States, as measured by Gross Domestic Product, has more than picked up the slack for the world’s second largest economy at a rate of 2.3%. As we monitor potential risks to portfolios, whether domestically or from abroad, we maintain diversification of assets to mitigate risk and reduce volatility while remaining committed to our investment philosophy of purchasing high quality and appropriately valued assets.

We wish you well for the rest of the summer and look forward to connecting with you in the second half of the year. As always, please feel free to reach out to one of your WealthSouth advisors should you have any questions.