Good morning & happy Monday!
“People often say there’s a lot of uncertainty, but when has there ever been certainty in the markets, the economy, or the future? I’m just trying to understand the present.”
– Bill Miller, business author
Welcome to August my friends! Holy cow, July was CRAZY!!!
In this “what’s happening right now” media culture we live in, news seems to break all the time and we as a public get very bored by information we already know. We want new news. So, the media feeds us new news. I hate the media, they do irreparable damage to our society and the investing success of the investing public, but I’m going to save that for another memo … it’s a topic I get quite worked up about!
July saw an assassination attempt on Donald Trump, the first assassination attempt on a U.S. president since Ronald Reagan on March 30, 1981. Just a few days later Joe Biden abandoned his presidential campaign for a second term. No matter where you sit on the political aisle these are monumental developments that happened less than 200 hours apart.
We were literally centimeters away from the Republican candidate for president being killed and the Democratic candidate decided to drop out of the race. We entered July believing that our November election would be a choice between Joe Biden and Donald Trump … and July brought about monumental change.
There were plenty of other newsworthy headlines to grab our attention in July as well. The Secret Service failures in protecting Donald Trump, Kamala Harris becoming the Democratic nominee for present, drag queens stealing the Olympic spotlight, Hezbollah terrorist attacks in Israel … does anyone else feel like the world is on fire right now?
One would think with this much instability in the world that the stock market would be crashing. How could it not?
Here’s a little secret that the media will not tell you … the markets pretty much don’t care about the headlines, they care about corporate profits. If the headlines don’t affect profits, then the market is pretty much indifferent.
July is the perfect teaching opportunity for this lesson.
July saw U.S. large companies, measured by the S&P 500, up by 0.6%, but small cap U.S. based companies, measured by the Russell 2000, was up a whopping 10.1% in July.
Is the market disconnected from the real world? What are they seeing that seems in such stark contrast to what we see on the news?
Without getting too deep into the weeds, the market is thrilled to see the economy cooling. Inflation is easing and the Federal Reserve will likely respond by lowering interest rates. Lower interest rates make it cheaper to borrow money and create opportunities for companies to refinance debt that was at higher rates. This all results in higher corporate profits. And it’s these higher corporate profits that drive stock prices. So, the economic conditions are looking more favorable in the future (which is fascinating, because the Fed has not even started cutting rates yet) which is why we’ve seen a positive month in July.
As an important note: during the last few years we’ve seen large companies outperform small companies in regard to stock market performance. There are several factors contributing to this, the interest rate environment most certainly being on the top of that list. We’ve made a tactical overweight into small caps in our portfolio construction in preparation for an opportunity like July presented. Despite underperformance in some periods of time, we are firm believers in proper diversification amongst asset classes and July is the perfect example of why we rigorously adhere to these diversification principles.
Wow, those are a couple of super nerdy paragraphs, I couldn’t help myself 😉
Bottom line, what you see on the TV, what you read online, and what is all the rage on social media have very little to do with what you will see on your investment statement. Divorce your politics, your biases, and your gut feelings from your investment strategy. Let a diversified investment portfolio do its job and realize that portfolio really doesn’t care what the talking heads on your TV say.
August has gotten off to a rocky start, but diversification has been critical these first few days of August as well. I’ll plan on discussing that a bit more next week as these moments provide tremendous learning opportunities.
It is a tremendous joy to work with you and navigate these ever-changing waters together. Please never hesitate to reach out if there is anything we can do to support you along the journey.
Make it a great week ahead!