“On June 7th, the Federal Reserve announced that U.S. household net worth ended the first quarter of this year at the astronomical record sum of $160 trillion. This is a staggering statistic. It is the direct result of nearly two and a half centuries under a system in which individual initiative, hard work, and thrift were given free rein as a fundamental human right.”
– Nick Murray
Last month, we studied the “Armageddon Question.” This month, we pause to take stock of the first six months of 2024 in our mid-year review.
Great Investors Reflect at Mid-Year
It’s a genuine pleasure to report to you on the progress of our portfolio and investing philosophy during the first six months of 2024. As we usually do in these reports, we ask that we first remember a handful of what we regard as timeless truths about enduringly successful wealth management. Then, we can proceed to some more current observations.
Investing Philosophy
Before we discuss the current investment environment, it is probably worth doing a quick review of the core principles and beliefs that guide our investing philosophy. We have long believed that an enduring philosophy is far superior to a current “outlook” and that if you have the former, you usually don’t even need the latter.
It is the very few truths about investing that never change, rather than the myriad trends/events that do, which should always be our primary concern in investing.
So, here are the core elements of our belief system:
- We are goal-focused, plan-driven, long-term equity investors. Our portfolios are derived from and driven by your most cherished lifetime financial goals, not from any view of the economy or the markets.
- We do not believe the economy can be consistently forecasted, nor the markets consistently timed. We do not believe it is possible to gain any advantage by going in and out of the markets, regardless of current conditions.
- Therefore, we believe that the most efficient method of capturing the total premium compound return of equities is by remaining fully invested all the time.
- We are thus prepared to ride out the equity market’s frequent, often significant but historically always temporary declines. We believe that even during such trying episodes, our reinvested dividends will buy lower-priced shares—and that the power of equity compounding will continue to our long-term benefit.
Current Observations
The first six months of 2024 can be simply but accurately summed up in two observations.
- The U.S. economy continued to grow, however modestly.
- The equity market—responding to accelerating earnings growth and dividend increases—did very well indeed.
Economic growth remained marginally positive, continuing to avoid recession, while job growth continued relatively strong. Inflation slowed very grudgingly, providing the Federal Reserve with no urgent prompting to reduce interest rates.
Monetary policy remains gently but quite firmly restrictive— that is, the fed funds rate is well above the inflation rate—as we believe long-term investors should want it to be. Getting inflation down to the Fed’s target of two percent remains job one.
Even without stimulating rate cuts, the equity market advanced solidly across a broad front: all three major stock indexes are significantly into new high ground. The impetus for this has been just what it fundamentally ought to be: strengthening earnings and rising dividends. Bloomberg’s current estimates are for the S&P 500’s earnings to be up about 8.8% this year, followed by a further 13.6% increase in 2025.
Even though cash dividend payments to shareholders are at record-high levels, S&P 500 companies are still paying out a below-average percentage of earnings (about 37% versus the average for the last 30 years of nearly 46%). Between that and sharply increasing earnings, there would appear to be quite a bit of room for further dividend growth this year and next.
Earnings and dividends are the variables that ultimately drive the long-term value of our core investment asset: ownership equity in a broadly diversified portfolio of enduringly successful companies. Not the national debt, not the looming election, not the presence or absence of Fed rate cuts, not war(s), not the onset of the next regularly scheduled government shutdown “crisis.”
We continue to believe that the more we focus on the fundamental strengths of our core asset, the more we’re able to tune out the noise, and the less danger we will be in of emotional overreaction to gyrations in “the stock market.” We believe in our plan, and we like what we own. Heck, we love what we own.
Thank you, as always, for being our clients. It is a privilege to serve you.
Helping Those You Care About
Over the last two years, the faith of all long-term investors has been severely tested. As must happen every few years, we were basically required to do just one big thing: reject the idea that “this time it’s different” and hew to the belief that “this too shall pass.” We must not doubt that we’ll get many additional opportunities to practice patience and discipline in the years to come.
Successful investing, while always fundamentally simple, will never be easy. You may have a family member, colleague, or friend who perhaps did not fare as well during the 2022-23 bear market and who you feel might have benefited from the sort of advice you were receiving. Should that be the case, we would certainly appreciate if you could introduce us to them. We very much enjoy working with you and would welcome the opportunity to offer the same level of planning and service to people you care about.
Thank you, most sincerely, for being our clients. It is an honor and a pleasure to serve you. All the best!