Gross domestic product increased at an annualized rate of 1.4% in the first quarter, according to the third estimate released by the Commerce Department’s Bureau of Economic Analysis. This represents an upward revision from the second reading, reflecting more accurate data about imports, nongovernmental fixed investments, government spending and consumer spending.

Total nonfarm payroll employment in the U.S. grew by a strong 206,000 jobs in June, reflecting new positions across a swath of industrial sectors. The unemployment rate inched up to 4.1% while the labor participation was little changed at 62.6%.

Initial jobless claims decreased by 6,000 to 233,000, seasonally adjusted, in the week ending June 22. The four-week moving average, which removes volatility, increased by 3,000 to 236,000.

The Consumer Price Index for All Urban Consumers declined – you read that right, declined – 0.1% in June on a seasonally adjusted basis, according to the Labor Department, after a flat May. Core inflation, which omit historically volatile food and energy costs, rose 0.1%. Over the last 12 months, the all-items index increased 3.0% before seasonal adjustment, compared to 3.3% in the preceding month. Shelter prices continue to rise, but more slowly than they have been over the past year. While grocery prices were mostly flat, food away from home continues to get more expensive.

The Commerce Department’s latest reading of the Personal Consumption Expenditures index – the Federal Reserve’s preferred inflation metric – actually decreased by a trace amount in May, tamping down annual price increases to 2.6%. A year ago, it stood at 4.0%. While prices for goods dipped a bit overall in May, the biggest driver of inflation that month was airline tickets.

The Conference Board’s Consumer Confidence Index settled back down after May’s surge, ending June at 100.4; a reading of 100 signifies consumer confidence is equal to where it was at the start of Ronald Reagan’s second term.  Consumers continue to appear cautious in their short-term expectations despite their satisfaction with current conditions. While this once suggested a recession was imminent, this time the “Expectations” rating has been flashing red for five months, but no other data indicate the economy is on the verge of contraction.

The S&P 500 gained +3.6% on a total-return basis in June, or 15.3% at 2024’s halfway mark. The CBOE VIX “fear gauge” closed at 12.44, a 3.7% improvement for the month, ending almost exactly where it was at the start of the year.

The 10-year Treasury note ended June with a 4.343% yield, having started the month at 4.554% and the year at 3.886%.

It wasn’t a good month for global equities, but the year-to-date numbers are all positive.

The only index to outpace the S&P over the course of six months, though, was Tokyo’s Nikkei 225, which jumped +18.3%, partly on the strength of its +2.8% June gain. The others which we usually track all came in ahead year-to-date, but only in the mid-single digits.

For the month, Amsterdam’s Euronext 100, Frankfurt’s DAX, and London’s FTSE 100 were down -3.0%, -1.4% and -0.8% respectively.

Hong Kong’s Hang Seng and Shanghai’s SSE Composite dipped -2.0% and -3.9% in June, respectively.

In early July, U.S. Federal Reserve Chair Jerome Powell and European Central Bank’s President Christine Lagarde participated in a panel discussion, both indicating that they are open to interest rate cuts between now and the end of the year – her more than him.

According to the CME FedWatch Tool, Wall Street traders surveyed expect a quarter-point decrease on the U.S. Federal Reserve’s target rate, but not until September 18. A consensus appears to be forming around the likelihood of a second cut in December.

West Texas Intermediate crude prices switched direction, ending June at $81.54 per barrel, up +5.9% and +13.8% for the half-year.

Gold prices flattened, losing +0.3% to end the month at $2,339.50 per ounce. Still, the precious metal is up +12.9% since January 1.

In June the dollar gained just over +1.2% and +0.8% in London and Frankfurt, respectively. Against the yen, though, the greenback rose +2.2% for the month and 12.5% year-to-date.

Bellwether cryptocurrency bitcoin gave back much of its May surge, down -8.3% to end June at $61,936, as 75,000 coins that had been untradable for 10 years came on the market. Even so, it’s still up a whopping +45.6% over the course of six months.

Rebalancing act

Are you invested 60% in stocks and 40% in bonds? We doubt it. If that’s all you’re doing to manage your portfolio, you’re probably not reading this.

Investment isn’t a snapshot – it’s a movie. A lot happens between the opening credits and the inevitable fade-to-black, and you need to keep up with the plot.

When to rebalance

Let’s not make things more complicated than they need be and just go with the standard 60/40 allocation. (We’re also including cash equivalents with bonds – again, just to keep it simple.) How much stock is growth-driven and how much is dividend-yielding value shares? What sectors are you holding now, and which do you want to buy into or sell off? And do you tilt more towards mid-caps, large caps or mega-caps?

How much of your fixed-income is in corporate bonds, how much in government bonds and how much in municipal bonds? Oh, and speaking of debt securities: What proportion are in 30-year and what proportion are in 10-year or shorter tenors? (By the way, in the real world, most retail investors never get anywhere near the actual bond market. They buy shares of bond market ETFs that trade like stocks.)

Another way to slice it for both stocks and bonds is geographic: How much of each type of security is tied to the U.S., how much is in other developed economies and how much is in emerging markets? You can even get more micro on your domestic holdings, especially if you’re holding real estate investment trusts or similar instruments.

The nature of the markets is that stocks outperform bonds in the long run. So if you invested $60,000 in stocks and $40,000 in bonds, it won’t be long before your 60/40 split turns into a 75/25 split. Periodically, you might want to sell off some of your equity and buy more fixed income to stay in balance.

Or maybe not. To be honest, this 60/40 convention is just something reasonable that’s easy for both investors and advisors to understand. Your risk preference might indicate that 75/25 is right where you want to be. Alternately, as you age you might become more risk-adverse and 40/60 in favor of bonds might be more appealing.

So clearly, you want to rebalance periodically just because you’re always getting closer to retirement age and your risk profile is likely to change along with your hair color. But that’s not the only reason.

If you just ride the stock market – put the whole equity slice of your portfolio in an S&P 500-tracking ETF and ignore it for 30 years – your investment will increase around 8% adjusted for inflation in a typical year. But when have you ever seen a “typical year”?

So market conditions might encourage you to rotate your holdings. Some industries perform best at the top of the economic cycle, and some are safe harbors during the bottom. Others still flourish before or after the peak.

How to rebalance

You have two options if you decide to reset your allocations. The obvious one is to sell off the securities that don’t fit and use the proceeds to buy ones that do. It’s an effective method, and you can get it done in a day. But should you?

Trading stocks and bonds isn’t as expensive as it once was, but there’s still some friction in the process and still some expense. So you have to ask yourself, “Does it really bother me that I’ve got a lot more large-cap Consumer Discretionary shares than I need and not nearly enough exposure to long-term emerging market bonds?”

If you can still sleep at night, consider changing the composition of your portfolio gradually. You could just stand pat on the asset classes you no longer wish to pursue, then concentrate on acquiring – through the regular course of your investing – those securities in which you’re underweighted.

Catherine Brock recently published an excellent article in Forbes that goes into much more depth.

When to call it quits

Rebalancing over time doesn’t just save you brokerage fees. It can also postpone a taxable event.

“When rebalancing, it’s paramount to pay attention to the type of account your assets are in and the length of time you’ve owned them. These factors will determine how your capital gains or losses are taxed,” according to Giovanny Moreano at Bankrate. “For example, rebalancing your assets in tax-advantaged accounts like a 401(k), IRA, or Roth IRA, will not incur any short- or long-term capital gains taxes. Alternatively, capital gains generated in standard investment accounts are taxable by the U.S. government.”

Let’s not forget, though, that this is a blessing: making so much money in the stock market that the tax man wants to take it away. Still, you’re going to guess wrong on occasion and have to take a loss. That’s where tax-loss harvesting comes in.

This is when you unload securities at a loss, then use the money from the sale to buy similar but not identical securities.

“The loss generates a tax deduction but maintains the portfolio's balance,” according to Jane Adler at Crain’s.

If we lost you anywhere along the way while discussing this subject, we apologize. Bear in mind that we did our best to keep it simple. But it isn’t simple. It requires expertise on the part of an experienced financial professional as well as discipline and good habits on your own part. Maybe it’s time for both of you to meet to discuss how and when to rebalance your portfolio.

Yet another note on Boeing

Four months later, and Boeing is still making more news than a healthy company should make.

First, at this newsletter’s deadline Boeing had reportedly come to a plea deal with the U.S. Justice Department. The company will plead guilty to a fraud conspiracy charge and pay $243.6 million in fines. This is related to two incidents in which 737 MAX jets crashed, killing a total of 346 people.

And as for those astronauts who flew Boeing’s Starliner spacecraft to the International Space Station? As of this writing, they’re still there because of issues with the vessel’s thrusters. It is now Day 36 of their nine-day mission, although NASA is quite keen not to describe the pair as “stranded”. But how do you describe yourself if you’re stuck in St. Louis overnight?

You might look at a company like this and say, “Wow, the wheels are really coming off!” You’d mean it figuratively, but in Boeing’s case …

-Chris

Chris Lott, CFP®, CPA

Financial Partner and Wealth Advisor

Chris Lott, CFP®, CPA is a Managing Partner at Smith Anglin Financial, and is a member of the firm’s Investment Committee. He regularly meets with prospective clients, counsels existing clients, leads investment portfolio analysis and develops materials for communicating with the firm’s clientele and target markets.