June Newsletter to Clients

Enjoy this month’s edition that features a review of the stock and bond markets so far this year as well as a note about Social Security.

There’s an old adage in stock investing that says, “Sell in May and go away.” This is based on the data that the top performing 6-month period historically has been November through April. Following advice like that is, of course, a fool’s errand and would have caused an investor to miss out on a very good May this year. The S&P 500 index of large, U.S. stocks gained 4.8% last month, it’s best May since 2009. Glad we didn’t go away.

Here's how stocks and bonds are doing so far this year through May:

• S&P 500 – up 11.3%;
• Dow Jones Industrials (30 companies) – up 3.5%;
• Russell 2000 of small, U.S. companies – up 2.7%;
• MSCI EAFE of international companies – up 7.5%
• U.S. Aggregate bond index – down 1.6%.

At the beginning of the year, investors expected the Federal Reserve to reduce interest rates, maybe even as many as 7 times during 2024. That hasn’t happened because inflation remains sticky and the Fed seems determined not to repeat their mistake from the 1970s where they reduced rates too soon and inflation came roaring back. Furthermore, the economy is still growing - at a 2.9% annual rate over the last four quarters - so the Fed can be patient in waiting to reduce rates until the data shows inflation cooling to the Fed’s target of 2%.

Normally, higher interest rates will be a drag on stock performance but, with the economy humming, corporate earnings have been strong and investors think that will continue. After all, investors only pay more for stocks when they believe companies’ earnings will grow in the future.

Bonds have suffered this year with higher rates. At the end of 2023, the yield on the 10-Year Treasury – a common bond yield benchmark – was 3.88%. At the end of May, the yield on the 10-Year was 4.51%. While counterintuitive, bond prices fall when yields rise. So, those rising yields have hurt bond performance this year so far. The good news is that yields on our bond funds are strong and when interest rates eventually fall – whenever that is – historically that has meant a rise in bond prices and better overall returns.

We are often asked by clients about Social Security and whether people should expect to receive benefits in the future. Why do people ask? Because there have been repeated reports that, unless action is taken, benefit cuts of roughly 20% would start in 2033 because of the declining amounts in the Social Security Trust Fund.

First, a primer on Social Security. Most of the revenue that funds Social Security comes from the payroll tax. Back in the 1980s, it was recognized that when the baby boomers were retiring there would be more money flowing out of Social Security than came in each year. So, they created a process to build a surplus in the Trust Fund to hopefully make up the difference. They expected the Trust Fund to bridge the gap until the 2050s and then further action would be necessary. Unfortunately, that was wishful thinking and we’re now faced with a dwindling Trust Fund.

What you need to know: Even if the Trust Fund runs down to zero, there are enough tax revenues flowing into the system to pay about 80% of the benefits.

While betting on what Congress will do is probably not the wisest use of your money, Social Security is not only absolutely necessary but wildly popular, particularly among those who vote. So, eventually, they’re likely to do something. They could raise payroll taxes on those of us still working; they could raise the income on which payroll taxes are levied – the limit is $168,600 this year; or they could adjust the Full Retirement Age from its current age of 67, at least for most of us. Most likely they will enact a mixture of adjustments in order to keep benefits flowing at their current levels.

As the Chief Compliance Officer for Moneywatch, I am extremely uncomfortable providing any guarantees, particularly guarantees on things I don’t control. But, I do believe Social Security will live in the future and will continue to be an important part of our clients’ income when you retire.

Thank you for your continuing confidence.

Ramsey Bova, President and Owner, CFP®