Market Trends 2024 – Q2

The Weight of the Evidence

TLA continuously researches and monitors economic and market trends on behalf of the families we serve.

Hazards of Deflation:

Inflation is in the headlines every day and nobody likes it.  Have you thought about what the opposite of inflation is?  “Deflation” is the term economists use to describe when prices and/or values go down.  In the short term, price deflation may feel good.  After all, who would not want to pay less at the gas pump, the grocery store or the drug store?  The longer-term problem with deflation is that it creates a downward spiral that is very difficult to reverse once it starts.  This is what happened in the Great Depression in the 1930s and lasted over a decade- resulting in 25% unemployment, bank failures, and the permanent loss of multi-generation family-farms.  More recently, starting in the 1990s, Japan’s economy suffered from deflation for about 15 years.  My son was born in 1989.  I recall that the Japanese stock market made up a full 40% of the entire world’s market value back then.  Today it is closer to 7%.  More to the point, the Japanese stock market went down so far and for so long that it just recently recovered to where it was 35 years ago.  Yes, my son had his own son before the Japanese stock market fully recovered from the devasting effects of deflation.

Deflation is what Federal Reserve chairs Ben Bernake worried about during the Great Recession and Jerome Powell worried about during and after the pandemic.  Now Chairman Powell also worries about the very real inflation that remains stubbornly “sticky,” even though it has certainly come down from earlier highs in 2022.

Lessons from the Masters:


Watching The Masters Tournament this weekend I thought about the golf clubs professionals have and use in their golf bag.  Each player is allowed exactly 14 golf clubs.  While there is no requirement to use all of them, you will rarely see a professional use less than all 14 in each round they play. Each club plays a unique role. Each is an important function in the diversified portfolio the golf professional’s caddie carries for 18 holes. Imagine a golfer qualifies and makes it to the final round of the Masters upon which he becomes so confident in his abilities that he tells his caddie he only needs 7 clubs for that final round.  In that case, you would hope that he at least diversifies his club selection by choosing different types of clubs from the driver down to the putter.  But no, this golfer loves to “grip it and rip it.” So he tells his caddie to only pack his bag with the 7 clubs that he hits the furthest.

Anyone who follows the game of golf knows how foolish this would be.  Yet we see far too many investors doing the equivalent of this in their investment portfolios – owning just 7 of the thousands of publicly traded equities.  And these 7 are viewed as “high-octane,’” meaning they can go the furthest distance in a short period of time.  Having done this for over 40 years, I’ve seen that some in every generation must learn the hard way that “diversification,” as Noble Prize winner Harry Markowitz taught us “is the only free-lunch in finance.” As students of finance, we recognize that diversification means not just owning more than 7 popular stocks, but also owning other assets that are non-correlated to the stock market.  All of this is designed to generate the “Honolulu- like” returns we strive for to buffer the volatility and keep it in the fairway.

Stay The Course:

Currently, stocks seem fully-valued, and surveys of small business owners show pessimism, but the economy remains resilient along with very low unemployment and surprisingly high corporate earnings.  As the Fed attempts to thread that needle between inflation and deflation, we expect volatility and therefore remain fairly defensive.  We continue to like strategies that attempt to “buffer” that volatility.

In fixed-income, we recently began to take advantage of relatively higher rates on bonds, and expect to continue to do so, but continue to remain decided short term as long as the markets reward us for that.  Finally, we continue to do due diligence and vet alternative investments less correlated to stocks and bonds in order to buffer market volatility.

Keep it in the fairway!