Q2 2024 Market Quarterly

Q2-2024 Market Results

It was another decent quarter for the stock market. The S&P 500 was up +3.71%, a good result after last quarter’s strong return. International markets were down -1.48%. Emerging markets were up a decent +4.13%. Bonds were up very slightly for the quarter, coming in at +0.07%. Short treasuries were up nicely, at +0.94% for the quarter.

A closer look at the markets shows the S&P 500 a little bumpy through the middle of April, then trending up to the quarter close. U.S. Technology also had a strong run, which was, in fact, stronger than the S&P 500. Although bonds have not experienced the recovery we’ve talked about before, we at least got a very small positive return for the quarter. We feel confident no bond recovery will begin until the Federal Reserve (Fed) starts reducing interest rates.

Q2-2024 Notes

Building on what we saw last quarter, the U.S. in the second quarter continued its upward move based on strong hiring, low unemployment and resilient (though recently lower) Gross Domestic Product (GDP). And it is true that if you have low unemployment and strong hiring, then much of the population is working, earning an income, and able to spend. But we feel it is important to understand the risks, too, something the markets may be ignoring. Our first area of concern is retail sales, which were down in April and barely up in May. Declining retail sales is a concern because if consumers aren’t spending, GDP will likely be affected. Corporate profits are next on our list of concerns since corporate earnings were down in the first quarter of 2024. Not by a huge amount, but declining corporate earnings is a concern for the economy’s overall health. 

Finally, we are seeing an increase in credit card delinquency rates. The first quarter of 2024 had a delinquency rate of +3.6%, the highest reading since 2011. As illustrated above, consumers struggling to make ends meet could lead to reduced retail sales. The Fed is important here as it has been unable to reduce interest rates because of how sticky inflation has been. Keeping interest rates at this high level will slow the economy. We feel that slowing is already happening. And if we are right, our next concern is that we may see a recession later this year or early next year. We aren’t predicting a recession, but we feel the risks are rising, and we cannot ignore what we see.

Global Outlook

We want to talk about a global topic that has come up quite a bit lately: Russia and its outreach to other rogue nations. Russia is in a very difficult position at this time. They are almost completely locked out of the sphere of Western nations, including the United States, Canada, Australia, and most of Europe. Western nations have greatly reduced trade with Russia as they have decided that buying from Russia and thus supporting their economy is undesirable. Russia’s invasion of Ukraine has essentially left it as an outlying, pariah state. And more and more, Russia is responding by looking to other rogue nations for help. Here are a few examples.

North Korea is very much a pariah state with almost no outside connection with Western countries. North Korea doesn’t make much in the way of sellable goods, except some defense materials. North Korea is often on the verge of famine, so buying food stocks from Russia is a logical choice. Selling Russia ammunition and artillery equipment also makes sense. North Korea can make artillery and doesn’t need it domestically at this time as they are not in an active military situation. North Korean artillery isn’t exactly the most reliable or technologically advanced, but it gives Russia more volume to throw at Ukraine, which they need. Russia is also able to sell North Korea some degree of technology that North Korea is unable to develop on its own. This is especially true of space-related technology. North Korea has very little to offer Russia, and Russia knows it.

Iran is a somewhat similar case. Iran is almost completely disconnected from Western nations due to its broad sanctions, Islamic religion-based government, and proxy activities since its 1979 revolution. Russia is buying drones in volume from Iran and using them in Ukraine. Iran can build drones because its Islamic Revolutionary Guard Corps (IRGC) has built a domestic manufacturing hub to build defense materials to supply to its many proxy forces, such as Hamas in Palestine and Hezbollah in Lebanon. The cash Iran receives from Russia for buying drones helps fund its other projects, such as its nuclear program. Iran is a large country with a good amount of arable land, so it doesn’t need Russian food as much but benefits from Russian technology. Mostly in its nuclear ambitions, as Iran is not particularly interested in space. Iran has threatened to become a nuclear power, and it continues to refine uranium to levels higher than what is needed for simple domestic power production. Here again, Iran is a pariah state, and connecting with Russia is helpful, but the amount of trade they can exchange is limited.

Finally, we have China. China and Russia have been very friendly of late, though their history has been somewhat less friendly. Historically, Russia and China have not always trusted each other and have been on opposite sides on multiple issues. Russia can sell large amounts of oil, gas, and other energy products, which China needs and benefits from getting these products at reduced cost. China could supply Russia with defense materials that would be as technologically advanced, or even more so, as the Russian equivalent. However, China is being very careful not to supply these types of weapons to Russia as the resulting sanctions applied by the United States, Europe, and other Western countries would be far too damaging to the Chinese economy. China is likely supplying Russia with base materials for defense use that are hard to track and won’t lead to sanctions. Overall, Russia is too limited in its global position to be worth the risks presented to China. China will continue its high-level friendliness but not go much further.

Disclosure: Past Performance is no guarantee of future performance

Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Securities and Exchange Commission.

This newsletter is for general information only and should not be considered investment advice.  Investors should consult with a trained investment professional to discuss their particular situation.

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