KCG Investment Advisory Services

Kimberly Good

315 Commercial Drive, Suite C1

Savannah, GA 31416

912.224.3069

www.kcginvestmentadvisory.com

Dear Client...What You Think Matters
Market Update
(all values as of 08.30.2024)

Stock Indices:

Dow Jones 41,563
S&P 500 5,648
Nasdaq 17,713

Bond Sector Yields:

2 Yr Treasury 3.91%
10 Yr Treasury 3.91%
10 Yr Municipal 2.70%
High Yield 6.92%

YTD Market Returns:

Dow Jones 10.28%
S&P 500 18.42%
Nasdaq 18.00%
MSCI-EAFE 9.72%
MSCI-Europe 9.81%
MSCI-Pacific 9.34%
MSCI-Emg Mkt 7.44%
 
US Agg Bond 3.07%
US Corp Bond 3.49%
US Gov’t Bond 2.95%

Commodity Prices:

Gold 2,535
Silver 29.24
Oil (WTI) 73.65

Currencies:

Dollar / Euro 1.10
Dollar / Pound 1.31
Yen / Dollar 144.79
Canadian /Dollar 0.74

I am the Portfolio Manager and Chief Investment Officer for KCG.  Sounds pretty fancy!

But it is not just a title but the focus of my world as your Advisor; and it is one that many “advisors” cannot necessarily claim because they are sales and service representatives and not the portfolio decision-makers.  It is my job to decide what to buy and sell within your accounts, and I should be able to articulate to you why I make those decisions.  That said, one thing I do not do for you is vote regarding corporate actions like proxies on corporate board decisions or deciding whether to accept a tender offer.  I am always eager to share my knowledge and insight regarding particular issues, but my clients have a wide range of opinions and personalities and these decisions can be very personal.

For example, the decision-making process has and does include “ESG” standards or Environment, Social and Governance.   I am passionate and have been writing about this movement since 2006.  It now impacts almost every organization and it has the potential to greatly affect the profitability of most companies – both public and private.  The three principles embodied are Environmentalism, Social Justice (DEI), and Corporate Governance.  Blackrock and leader Larry Fink had been and continues to approach companies held in Blackrock and iShare funds. (If you have a retirement plan, you probably hold some iShares.)  They pressure these companies to follow the ESG standards or be removed from the funds (Read as “Corporate Governance”). Indirectly, this is also having a great impact on the indexes since any company declining to adhere to the ESG standards loses Blackrock shareholder investments.

Currently, I have heard estimates that ~80% of the companies in the S&P 500 have adopted some version of these standards; but adoption often requires a corporate action.  When corporate boards vote on these issues, you likely receive a proxy.

You may believe that your investment in any one company is a drop in the bucket and your proxy carries no weight.  But just like electing a government official, your vote counts.    It is only when we exercise the privilege to vote that our opinions can be considered.  Just like the ballot box, it takes each of us and all of us to make a difference.

My services do not include me voting on your behalf because my opinion is not what matters here.  If you have assets managed elsewhere, I suggest you take back the right to vote your own proxies.  My job is to tell you what you need to know, how it affects your portfolio, and what I’m doing about it.  Along those lines…

My August newsletter will address the strength of the dollar and the recent failure of Saudi Arabia to renew the Petrodollar agreement.  Through our models, constructed and managed personally by me, KCG is developing a global footprint for preserving and stabilizing capital for our clients while enhancing returns through market participation.

I look forward to talking with you in person, again this quarter.

Regards,

Kimberly

 

 

 

 
average amount for a new car loan has fallen to $38,739

Macro Overview

Markets are being influenced by election dynamics and economic data, as equities and bonds respond to uncertainty surrounding the direction of future fiscal policy and when the Fed might commence its rate reduction initiative.

Equity indices ended the second quarter mixed as the S&P 500 Index and the Nasdaq Composite Index outperformed the Dow Jones Industrial Index. Technology related companies advanced during the quarter while energy and industrial companies lagged.

Big banks underwent a stress test, which is imposed by the Federal Reserve to determine financial viability as well as the ability for banks to withstand severe economic and financial shocks. All 31 banks tested remained above their minimum capital requirements during the hypothetical severe recession scenario, and are considered well-positioned to weather a severe recession and continue lending.

The most recent employment report showed that the unemployment rate rose to 4.1%, incentivizing the Federal Reserve to consider lowering rates sooner rather than later. Companies have been slowing their rate of hiring as well as increasing layoffs across various industries. Economists view these dynamics as indicative of decelerating economic activity. Some analysts expect the Fed to initiate rate reductions as early as September should economic data continue to substantiate slowing growth trends.

European central bankers, academics, financial market representatives, and journalists met in Sintra, Portugal in early July to exchange views on current policy issues and discuss long-term economic perspectives affecting European countries and the EU. Primary topics included continued inflationary pressures throughout Europe, the ongoing conflict with the Russian invasion of Ukraine, and employment challenges for the region. Subdued economic activity and slowing industrial production were part of the discussions, as Industrial production in the EU dropped by 5.4% between February 2023 and February 2024. The significant year-over-year decrease indicates a slowdown in industrial activity throughout Europe.

Financing costs for new autos remained relatively high in June, even though auto prices have been dropping. The typical monthly payment for a new auto loan set a record high of $740 during second quarter, thus reducing consumer demand even as the average price on autos continue to drop due to easing supply chains and ample inventory.

Technology is advancing as companies are reconfiguring their computing infrastructure from information retrieval to an A.I. approach. The changes and advancement are anticipated to take years and are expected to affect nearly every sector and industry.

A model used by the Federal Reserve in valuing residential home values found that homes are now 25% overvalued, just below the 28% peak in 2007. Using the Labor Department’s measure of rent, home prices are 19% overvalued using private measures of market rents. The Fed also follows the S&P CoreLogic Case-Shiller U.S. national home price index, which is up 51% since the end of 2019. (Sources: U.S. Treasury, Federal Reserve, S&P, Eurostat, Labor Dept., ECB, Dow Jones, Nasdaq, Case-Schiller)

 
S&P CoreLogic Case-Shiller U.S. home price index is up 51% since the end of 2019

Stock Indices Not In Sync – Domestic Equity Overview

The second quarter saw varying performance across the S&P 500 Index, as certain sectors outperformed while others underperformed. Technologies, utilities and communication services saw the largest gains for the quarter, while materials, industrials and energy experienced pullbacks. The S&P 500 Index was up 4.28% for the second quarter, while the Dow Jones Industrial Average posted a -1.73% decrease, and the Nasdaq Composite Index was up 8.5% for the quarter.

Various analysts are identifying a growing disparity among the major equity indices, indicating a market with narrow performance in just a few sectors, rather than broadly covering multiple sectors.

Sources: S&P, Dow Jones, Nasdaq, Bloomberg

China Is Exporting More & Making Cheap Products Cheaper – Global Trade Update

China is flooding global markets, including the U.S., with cheap exports across various industries including steel, electric vehicles, solar panels, computer chips, and other manufactured goods.

China’s factories are producing far more goods than its domestic market can absorb, leading to a glut of excess supply being exported at low prices to foreign markets such the U.S. and Europe. This overcapacity issue spans multiple sectors including steel, cars, solar panels, computer chips, and other manufactured products where China has rapidly expanded production capabilities.

China’s global trade surplus in goods has soared to around $900 billion in 2022, more than double the pre-pandemic level, indicating the scale of oversupply. Factors including China’s slowing economy, protracted property slump, and shift in consumer spending patterns have exacerbated the overcapacity problem.

The U.S., European Union and other trading partners accuse China of unfair trade practices such as subsidies, intellectual property theft, and forced technology transfers that have enabled the overcapacity trend. China’s government has been subsidizing Chinese companies in order to export more competitively and aggressively.

The current U.S. administration announced major tariff hikes on $18 billion worth of Chinese imports including electric vehicles, solar cells, semiconductors, and some medical supplies to counter the inflow of subsidized Chinese products.The prior administration imposed tariffs of 25% on $300 billion worth of Chinese goods in order to stem the import of such products from China. (Sources: IMF, whitehouse.gov)

 

 

 

 
The banks tested under the Federal Reserve program included 31 banks

Rates Start To Stabilize – Fixed Income Update

As recent economic data revealed a slowing economic environment in the second quarter, rates have begun to stabilize pointing to a downward trend over the next few months. The yield on the benchmark 10 year Treasury bond rose to 4.36% at the end of the second quarter ending June 28th, up slightly from 4.33% at the beginning of the quarter on April 1st. Even though rates have begun to stabilize, consumer loan rates are still elevated and hindering consumers from buying homes to cars.

Source: U.S. Treasury

Some Question Traditional Stock Market Indicator – Equity Analysis

The Dow Theory has been an indicator of the stock market for over 100 years, with a specific attention to transportation. It originated with a simple notion, that the Dow Transportation Index follows the Dow Jones Industrial Index. This is so because whatever the underlying 30 companies in the Dow Jones Index manufacture and produce, is ultimately shipped and transported to consumers and stores nationwide.

Market analysts have closely followed any disparities between the two indices for decades, trying to identify any lag or disconnect. Such a disparity has appeared recently, which may be an indicator of things to come. The divergence between the DJTA and the DJIA can be significant for market analysts and investors. According to the Dow Theory, the performance of the transportation sector (DJTA) should confirm the trends seen in the industrial sector (DJIA). If the two indices diverge, it may signal potential economic issues. For instance, if the DJIA is rising while the DJTA is falling, it could indicate that goods are being produced but not transported at the same rate, suggesting a potential slowdown in economic activity.

As of May 29, 2024, the DJTA was at 14,781.56, down by 213.56 points or 1.42% from the previous close. This reflects a year-to-date change of -7.03% and a 1-year change of 6.32%.
The DJIA, in contrast, had a year-to-date change of -2% and a 1-year change of 16.16%. Historically, this disparity in returns is greater than it has been.

Various factors may create or alter the performance of the Transportation Index, such as elevated fuel costs, weather, or logistical issues. Another factor has evolved more recently, whereas the believe that the U.S. economy has transformed into a more service oriented economy with non tangible products such as software platforms, not needing physical transportation or delivery. Incidentally, the objective results of any disparities have become much more subjective as analysts deduce varying reasons for disparities. (Sources: Dow Jones, Bloomberg)

 

Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period as of the date published.  All third party cate correlates with that published date.  Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.