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Life is beautiful. What could go wrong?
Life is beautiful. What could go wrong?

The first half of 2024 was another positive surprise for the stock market, hitting all-time highs despite the Federal Reserve’s much-hyped and hoped-for rate cuts failing to materialize. Technology stocks led the way again, but this time it was hardware (chips and equipment) rather than software mega-platforms that drove the rally. The best hardware performers were NVidia +156%, Micron Technology +59%, Applied Materials +53%, NetApp +52%, and Arista Networks +51.4%. The driver was artificial intelligence (AI), which still dominates the “Next Big Thing” story for U.S. stocks. With all the excitement around AI, it’s still not clear how the hyperscale data centers, which are the big buyers of AI chips and equipment, will generate revenue and profits from these billion-dollar investments. As a cautionary tale, the top 10 stocks in the S&P 500 now account for 35% of the index weighting.

The S&P 500’s 14% gain in the first half of 2024 was great, but the previous two calendar years provide important and sobering context. 2022 was a terrible year for stocks (-19.4%), but the +24.2% rebound in 2023 effectively erased those losses, yielding a meager 0.1% annualized return over two years. For the 30 months between 12/31/21 and 6/30/24, the annualized return was a modest +6%. OK, but not very good considering what inflation did to purchasing power over those same 30 months. For those without large stock reserves, it’s been a very uphill battle. Bonds were down in the first half of 2024 and have been down for the past three and five years as well. The Fed’s battle with inflation has left the bond market weakened and battered. Those in the housing market will tell the Fed that raising mortgage rates from 3% to 7% is a painful way to stabilize prices. For those financing at today’s mortgage rates, the cost of homeownership will be significantly higher for many years to come. That’s no way to tame inflation. Just imagine.

Commodities had a strong first half of 2024, with gold up $268, or 13%, oil up 13.5%, and natural gas up 10.6%. More broadly, the Commodity Research Bureau Index of 19 commodities from four sectors rose 13% in the six months and 82% over the past five years. That’s serious inflation hitting people’s wallets at the grocery stores and gas stations.

2024 is a mega year for politics. Almost half (49%) of the world’s population in 64 countries will be allowed to elect their national leaders, and incumbents are in the hot seat. Argentina has kicked out the bums, and Europe is facing seismic power shifts in the UK and now France. Such political turmoil creates an atmosphere for dramatic policy changes, with numerous intended and unintended consequences for economies and financial markets.

But the biggest challenge for new and old policymakers is the rapidly emerging “great power competition” between the US and its old allies in Europe and the Pacific on the one hand, and China, Russia and potential allies they are courting, such as India, on the other. This could herald a new Cold War, or at worst, a hot war. The current kinetic conflicts in Ukraine and Gaza are warning signs of what may lie ahead. All of this points to a paradigm shift affecting the unipolar status the US has enjoyed since the collapse of the Soviet Union in the early 1990s. The finely tuned global supply chains developed over the past 30 years are a marvel of logistics, technology, communications and open sea routes. As Covid has shown, disruption of global supply chains can be both crippling and inflationary. Unipolar status brings with it many fringe benefits that most of us take for granted. Losing these benefits would be a major headwind to the U.S. economy and our way of life for many years to come. Stay alert and watch out.

Ashby Foote III is president of Vector Money Management and a member of the Jackson City Council, District 1. He serves on the board of directors of Bigger Pie.

By Aurora