2nd Quarter Client Note – The Bull is Back

Led by a handful of big technology stocks (and defying most expectations), the S&P 500 (Total Return) Index gained 8.74% in the quarter and is up 16.89% YTD. These gains have led socks into “bull market” territory – up 20% from its previous low reached on October 14, 2022.

Large Growth is up a whopping 29.02% YTD. But this narrow market has left eight stocks accounting for 30% of the value of the index.

On the other hand, value stocks have lagged; gaining 4.07% for the quarter and 5.12% YTD. International stocks posted modest gains.

In the bond market, the Bloomberg US Aggregate Bond Index fell 0.84% for the quarter, but remains up 2.09% YTD.

The Fed has largely continued to raise short-term interest rates – with a pause in June. The yield curve remains inverted. Nevertheless, the economy has so far avoided a recession.

As usual, all the details can be found in Dimensional’s Quarterly Market Review.

Will Artificial Intelligence Rule the World?

The shiny object du jour is undoubtedly Artificial Intelligence – or AI. There is little doubt that AI is going to change the way we live — in ways large and small. People from all walks of life are using one of a number of iterations of an AI Chatbot. From engineers to writers to students, questions are being answered with incredible speed – but sometimes inaccurately.

I recently wondered out loud whether AI is going to make financial planners obsolete. Morningstar seems to be in agreement with me that AI won’t replace your financial advisor.

And, most importantly, for my retirment job aspirations, AI isn’t ready yet to perform standup comedy in either New Your or Las Vegas.

Investment Implications

The internet infrastructure will have to grow to accommodate the computing needs of AI. And, understandably, there is a lot of investment hype around AI as investors chase the next Apple or Google.

But as with most investment fads, it seems highly unlikely you will be able to find the needle in this haystack. It also seems unlikely that AI will be able to beat the market by picking stock winners.

So, it remains wise to stay broadly diversified and let the market do its work.

Death of a Giant: Harry Markowitz

Speaking of the market, this note would be utterly incomplete without mentioning the passing of one of the great (perhaps the greatest) contributor to the evidenced-based investing we practice here at RightPath. Harry Markowitz, the founding father of Modern Portfolio theory died last month at the age of 95. In 1990, Markowitz earned the Nobel Prize in Economics for his groundbreaking work, which actually began in the 1950’s when computers became available.

Prior to Markowitz, investments were viewed in isolation. A stock or a bond was either a good and prudent investment — or a bad one. The concept of a “portfolio” and how investments were related to one another wasn’t even an afterthought.

We now take for granted that the correlation of investment returns (how some securities zig when others zag) – is the essence of diversification and the foundation on which prudent investing rests.

RIP, Harry.

No Time for Complacency

With the recent changes in value of both stocks and bonds, now is a good time to make sure your asset allocation is appropriate for your goals and your risk appetite. This is especially true if you are nearing a major life change, such as retirement.

A diversified portfolio may be stronger than ever. Diversification will never result either in winning or losing the home run derby. But it will perform as it is supposed to and give you the best chance of reaching your goals.

If you have questions about what is the best strategy for your current situation – give us a call.

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