Posted: 06/12/2024
It’s already June! Let’s see where we stand in the stock and bond markets heading into the middle of the year.
Stocks
Pretty good! US large cap stocks, represented by the S&P 500 index, are up 11.3% as of May 31. If we think about the average annual S&P 500 return being about 10%, I’d say we’re in a great spot already! Large cap has led the way in the US with mid- and small-cap up 5.7% and 2.7%, respectively. International stocks are no slouch, either. Developed market equities (Japan, Canada, most of Europe, Australia) have returned 7.5% through the end of May with Emerging markets (China, India, Taiwan) having returned a respectable 3.5% in the same time.
The stock market has been resilient this year, seemingly ignoring the overall pessimism surrounding interest rates and inflation. Consumer confidence is still climbing after 2022 lows and there have been 23 million more people through a TSA checkpoint this year compared to the same point in 2023. Inflation has been controlling the news cycle all year, but not the markets. While interest rates and inflation may be impacting households’ bottom line, investment accounts are still growing. From the perspective of the stock market, day-to-day headlines and short-term noise is just that, noise.
Bonds
The conversation around bonds is still dominated by interest rates as a result of sticky inflation. At the beginning of the year, many experts expected inflation to continue its downward trajectory toward the Fed target of 2%, which in turn would allow the Fed to start cutting interest rates, sending bond prices higher. As many know, that has not happened. Inflation has come down a bit, but not enough to warrant any rate cuts and thus there has been very little movement in the bond market. Higher bond income has helped to alleviate some of the price volatility, but still the US Aggregate bond market is down -1.6% on the year.
Despite the year-to-date negative return and the poor performance of 2022, bonds have produced annualized returns of 2.50% dating back to 2009. The return has been outpaced by inflation over the same 15 years (3.40% annualized inflation to the 2.50% bond return) with most of the excess inflation coming since 2022. In today’s environment, bonds still deserve a place in a diversified portfolio, especially with the consideration that rates are expected to be cut in the near term.
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