The Three Rs

The Three Rs

Growing up, there was an expression that I heard often and never really paid close attention to.  The expression was that kids went to school to learn the three Rs – ‘reading, writing and rithmatic’.  I guess I never saw it written out, and for many years this just seemed like common sense to me.  Eventually, I realized the expression was a joke.  Only one of the words started with the letter R.  Not a great joke, more of an eyeroll, classic Dad joke, but it is a clever play on what we hear versus what actually is.

It’s a good reminder that things aren’t always what they seem.  Looking at this past quarter, it is noteworthy that the three major broad stock indices – the Dow Industrials, the S&P 500 and the NASDAQ – all hit record highs.  According to the National Association of Realtors, the price of the average home in June was the highest ever for the second month in a row.  The Department of Labor reports that the unemployment rate in June was 4.1%.  Full employment is considered to be 5%.  The stock market is humming and the job market is strong.  So far, the ‘rithmatic’ is looking pretty good!

Let’s take a different perspective on those numbers.  As shown in the chart above, even though the major indices hit new highs last quarter, the Russell 2000, which measures small-cap and mid-cap stocks, was down over 3% last quarter.  Seven individual stocks, called the Magnificent 7, account for over 30% of the S&P 500 index’s market cap, and even more of the NASDAQ’s market cap.  That is more concentration than most people realize.  Interest rates remain at the highest levels since 2001.  While home prices are at record highs, the percentage of new homes sold in June was down for the fourth month in a row.  The inventory of new homes is increasing while demand is showing signs of decreasing.  According to Transunion, average American credit card debt increased 8.4% from first quarter 2023 to first quarter 2024.  The average credit card interest rate on accounts that assessed interest rate was over 22.6%, according to the Federal Reserve.  That can be a tough hole to climb out of.   

There is one final, weird observation we would make from the above chart.  The S&P 500 and the Gold Index are remarkably close in performance over the past 12 months.  These two asset classes do not typically have a high correlation.  Equities are considered volatile and risky and gold is considered the safe-haven asset.  Strange bedfellows, indeed.  

Taken together, we get the sense that these indicators are giving us mixed signals.  We can find pockets of strength and weakness.  We must consider both when determining how best to invest.  A well-diversified portfolio of US equities, international equities, fixed income assets and real estate continues to be an effective tool to mitigate risk.  ‘Diversification of non-correlated assets’ might not be the basis of a good Dad joke, but it is a time-tested and effective strategy to limit risk when investing for the long term.



 *The index returns are drawn from Morningstar Advisor Workstation.  Indexes are unmanaged and cannot be invested in directly by investors.  MSCI EAFE NR USD-This Europe, Australasia, and Far East index is a market-capitalization-weighted index of 21 non-U.S., industrialized country indexes.  S&P 500 TR USD – A market capitalization-weighted index composed of the 500 most widely held stocks whose assets and/or revenues are based in the US; it’s often used as a proxy for the stock market. TR (Total Return) indexes include daily reinvestment of dividends. Bloomberg US Agg Bond TR USD This index is composed of the BarCap Government/Credit Index, the Mortgage Backed Securities Index, and the Asset-Backed Securities Index. The returns we publish for the index are total returns, which includes the daily reinvestment of dividends. The constituents displayed for this index are from the following proxy: iShares Core US Aggregate Bond ETF. MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Russell 2000 – Consists of the smallest 2000 companies in the Russell 3000 Index, representing approximately 7% of the Russell 3000 total market capitalization. The returns we publish for the index are total returns, which include reinvestment of dividends.  The MSCI Emerging Markets (EM) IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 2005 the MSCI Emerging Markets Index consisted of the following 26 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela.. The FTSE NAREIT Equity REITs Index is an index of publicly traded REITs that own commercial property. All tax-qualifies REITs with common shares traded on the NYSE, AMSE or NASDAQ National Market List will be eligible. Additionally, each company must be valued at more than $100MM USD at the date of the annual review. Equity REITs include Diversified, Health Care, Self Storage, Industrial/Office, Residential, Retail, Lodging/Resorts and Specialty. They do not include Hybrid REITs, Mortgage Home Financing or Mortgage Commercial Financing REITs. Bloomberg Sub Gold TR USD Description unavailable. Formerly known as Dow Jones-UBS Gold Subindex (DJUBSGC), the index is a commodity group sub-index of the Bloomberg CI composed of futures contracts on Gold. It reflects the return of underlying commodity futures price movements only and is quoted in USD.