Where do we go now? Where do we go? Where do we go now? Legend has it that Guns N’ Roses wrote these lyrics to their classic hit "Sweet Child O’ Mine" because they literally didn’t know how to end the song. GNR was one of my favorite rock bands growing up in the 90’s so I thought it would be fun to incorporate one of their songs in my update. Where does the market go? Where does the market go now?

We are currently experiencing one of the longest streaks of relative calm in the market. We haven’t seen more than a 2% pullback in the S&P 500 in over a year of trading.

The last major correction or 10% decline was in February of 2023. Market volatility is extremely low, which makes me think this could be the calm before the storm.

Of course, making market predictions is like trying to predict the weather months in advance.

The market could go up another 10% or 20% before the inevitable pullback. The truth is that no one really knows. I think it’s a valuable exercise to always mentally prepare yourself for a portfolio decline of 20% at any point. Remember, volatility is the price of admission for higher long-term returns.

Economic Backdrop

We are finally reaching a point where the economy seems to be cooling off. One reason is that much of the excess cash from the last few years has made its way through the system. We are now seeing near record levels of credit card debt and an uptick in car loan delinquencies. This may indicate that the consumer is almost tapped out.

My take is that almost everyone received and saved a boatload of cash during the pandemic and in the years following COVID, got used to a certain lifestyle.

At the same time, most consumers haven’t necessarily adjusted for inflation, which has caused everything to become about 20% more expensive over the past three years.

Most people have jobs and may even have higher incomes, but they are now overspending.

My clients are consistently surprised to see how much their spending has increased over the past few years. It's like the proverbial frog in the boiling pot of water; gradual changes can often go unnoticed until it’s too late.

This is what some are referring to as a "vibe-cession." Everyone feels the pinch from inflation even though all the economic indicators show a thriving economic backdrop with a low unemployment rate of 4% and a booming stock market.

Broken Record Time

So what should you do now? The answer is to stay the course, continue to save, and systematically put money to work in the market.

Don’t worry about a pullback, a correction, or even a bear market. These occurrences are almost guaranteed. If history is any kind of a guide, then we should also recover from these short lived events.

I’m often asked if it make sense to invest while the market is at an all time high. The truth is that the market on average makes a new high every 28 days. A record high in the market is the norm not an aberration. We can go weeks, months or even years without making a new high but this isn’t typical.

Yeah, But Isn’t This Time Different?

Everything seems a bit unhinged at the moment. We just had an assassination attempt on our former president against a backdrop of major political instability and two wars overseas that could easily escalate into something worse. However, from a historical perspective, this is completely normal. The reality is that we always look back at history through rose-colored glasses.

Instability is the norm, and there has always been a reason not to invest. As long as you believe in human ingenuity and that we will continue to make progress as a species, then it makes sense to continue putting money to work in the financial markets.

State of the Market

We closed a strong second quarter of 2024 with the market gaining momentum in July. The major indices, including the S&P 500, have been reaching new highs.

While small company stocks and real estate lagged behind in the second quarter, they have recently shown signs of improvement as inflation softens. However, small company stocks continue to trail the broader market, not having hit a new high for over 600 trading days which is a record.

Eventually the tide should turn and the performance should catch up to the low valuations and excellent fundamentals.

Bonds continue to lag their historical performance with a flat return for the year as interest rates have been all over the place.

The top heavy S&P 500 continues to consistently outperform. It’s interesting to note that the top ten companies led by NVDIA, Apple, Microsoft, Amazon and Google now account for more than 30% of total value with five hundred companies in the index!

The headlines around the S&P 500 making new highs are actually a bit misleading. About 75% of the companies in the S&P have not made new highs since the index is being driven by just a handful the largest companies.

Sustainably Investing in Emerging Markets

One of the main issues with investing in emerging markets is the prevalence of authoritarian governments that don’t respect individual rights, including both social and economic freedoms.

There is also a major correlation between authoritarianism and countries that are chalk full of resources, especially oil. This is known as the “resource curse”.

Our sustainable investment strategy sidesteps these areas of the market, which are potentially filled with landmines, both literally and figuratively.

Instead of broadly owing the emerging markets index we instead utilize a human rights-focused fund (FRDM) that has consistently outperformed it’s benchmark.

I met the founder of the Freedom Fund, Perth Tolle, about three years ago. We discussed her fund’s philosophy and strategy as well as her experience living overseas in China.

We both agreed that commonsense tells us that it’s a bad idea to invest in countries that treat women as second class citizens, don’t allow freedom of expression, jail dissidents and even worse.

After the meeting, Impact Fiduciary immediately allocated its emerging market exposure to the Freedom Index Fund, and we haven’t looked back. We have been very happy with the results, as the fund has been one of the top-performing emerging markets funds over the past few years. This decision was made before China’s economic troubles and the Russian invasion of Ukraine.

Estate Planning and Beneficiaries

My financial planning tip for this past quarter is to revisit your beneficiaries! As 401k balances have grown over the years, so has the potential legacy for your spouse, siblings, or children. There have been numerous cases where people forget to update their beneficiaries, accidentally leaving millions of dollars to ex-partners or ex-spouses instead of their intended heirs. For example, a man recently left over a million dollars to an ex-girlfriend from 1989!

At Impact Fiduciary, we help our clients with more advanced estate planning, such as creating living trusts, powers of attorney, and living wills. However, it’s essential not to lose sight of the basics, like regularly updating the beneficiaries on your 401ks and IRAs to ensure they reflect your current wishes. This simple step can prevent costly mistakes and ensure your legacy is passed on as you intend.

Enjoy the Ride

One of our main goals at Impact Fiduciary is to help our clients take the stress out of financial planning and investing so that they can live more fulfilling lives. As we head into the dog days of summer, we hope that you have the chance to kick-back and enjoy some time with your loved ones.

"Life is a journey, not a destination. Enjoy the ride." - Ralph Waldo Emerson

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.