Client Letter – Q2 2024

During the second quarter of 2024, the best performing asset classes were emerging markets stocks and the S&P 500 stocks.  The following chart shows the 1-year, 10-year, and 20-year performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:

Market Returns for the period ending June 30, 2024

DFA Fund / Index 1 Year Return 10 Year Return* 20 Year Return*
S&P 500 Index 24.56 12.86 10.29
DFA World Core Equity 18.32 8.21 N/A
DFA U.S. Large Value 16.03 8.39 8.71
DFA U.S. Small 11.66 7.97 8.85
DFA U.S. Small Value 15.75 7.69 8.51
DFA Real Estate (REITs) 6.27 6.07 7.73
DFA Int’l Large 11.55 4.53 5.81
DFA Int’l Large Value 13.56 4.27 5.93
DFA International Small 10.44 4.57 7.08
DFA Int’l Small Value 16.37 4.44 7.36
DFA Emerging Markets Core 13.27 3.48 7.78
DFA 5-Year Global Bonds 5.57 1.29 2.56
DFA Inflation Protected Bonds 2.92 1.93 N/A

*Note: Returns for periods greater than 1 year are annualized.  Top 3 returns are in bold.

The world stock market* had an OK quarter despite a downward move in April, returning 1.72% for the last three months, based on the DFA World Core Equity portfolio. However, most of our portfolios are more tilted towards small and value exposure, so our returns were either flat or slightly negative for the quarter.  The US bond market** returned 0.20% for the quarter as investors digested inflation data in an attempt to predict when the Federal Reserve will cut interest rates. Inflation initially took a step higher in March but then continued its trend downward in April and settled at 3.3% annualized for May. As a result, the markets now expect the Federal Reserve may hold off on cutting interest rates until early 2025.

The big story so far in 2024 is how top heavy the returns of the S&P 500 have been. The following year-to-date returns, according to J.P. Morgan, help illustrate our point:

33%                 “Magnificent 7” (Apple, Microsoft, Google, Amazon, Tesla, Nvidia, Meta)

5%                   S&P 500 excluding the “magnificent 7”

Clearly, the majority of this year’s return for the S&P 500 has come from the largest companies and our US large cap holdings have captured those returns. Notably, this has caused 36% of the S&P 500 to be concentrated in the top 10 largest stocks, which is a 50-year high. This, in of itself, is not a reason for concern but if history proves true then diversification is more important now than ever. In fact, if we look back at the top 10 largest companies from 2000, only one tech name remains in the list today.

While we are glad to have participated in the growth of large companies like Nvidia, we remain confident that other segments of the global stock market such as international stocks, value stocks and US small stocks are attractive based on current valuations and long-term investment principles.

Thank you for your continued trust and confidence.  As always, please don’t hesitate to call if you need to discuss something—that’s what we are here for.

Enjoy your summer!

Chris signature

*As measured by DFA World Core Equity Portfolio (DREIX)

**As measured by Vanguard Total Bond Market (VBTLX)

About Christopher Jones

Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.