What Summer Sporting Events Can Teach Us About Financial Markets

For sports fans, the summer of 2024 will be exciting as the Olympics return to Paris for the third time. There is also the annual cycling event, the Tour de France, and two big international soccer tournaments. This has us thinking: Can we relate these sporting events to the world of finance?

Here is a quick recap of financial market performance and economic indicators through the first half of 2024 -- before we connect the dots between financial markets and summer sports events.

It has been a very good year for the U.S. stock market, a good year for the international stock markets, and, we will say, a consistent year for bonds and the economy.

Tour de France: The Power of Leaders Driving the Markets

 

The Tour de France is a 3-week bike race traveling more than 2,100 miles around France (and part of Italy this year). There are about 170 riders who start the ordeal of mountain climbs, dizzying descents, and long, grueling days through the heat. These 170 riders make up the peloton, the group of riders in the tour who work together to be more efficient and ride at a blistering pace. 

During the Tour de France stages, the top riders and their teams drive the peloton forward. This is like what is happening in the U.S. stock market. The peloton-leading stocks are technology names, including Nvidia, Microsoft, and Apple, pulling the rest of the market. As we can see in the chart below, the so-called “Magnificent Seven” technology stocks are driving the entire market higher. Is this a bad thing? Not if you own those names as we do at Charter Oak. 

This is the power of indexing; we can invest in the entire peloton (or the U.S. Stock market) and allow the winners to run and pull everything else with them, as seen in the chart. 

Those stocks will tire out eventually, and new companies will lead the way. Jack Bogle, the founder of Vanguard, famously said about index investing, “Why look for the needle in the haystack when I can just buy the haystack?” Well, why try to pick the best rider when we can buy the peloton? This is why index investing works and why we are such proponents of it at Charter Oak.

Paris Olympics: Diversification of International Stocks

Viewers of the U.S. Women's Olympics Gymnastics Trials may have been struck by the incredible talent and skill of the athletes. As many have said, it is the most challenging team to make in the world, as only five gymnasts get to go to Paris as part of the team. The Women's U.S. Gymnastics team is like the American economy, the best in the world, with some incredible athletes (companies) doing extraordinary things. And while we will pull for the U.S. Olympians in Paris, we know not all of them will win gold medals. 

This is like international investing. We know many of the great athletes or companies are here in the U.S., but there are also many others from other countries who are incredibly skilled. And while U.S. companies will be the main engine of returns for our clients, we want to be sure we are diversified and capturing the returns of our international companies. Looking at some global stocks we invest in (following graph) through our international exchange-traded funds (“ETFs”), many are household names that create value for their shareholders and clients. We also want to be owners of these companies, knowing they may have the next great thing. 

 

International Soccer: How Mid-Sized and Small Companies can Win

 

Two international soccer competitions are happening this summer. The European Championships and the COPA America (tournament among North American, Central American, and South American Teams). Most of the time the larger countries with more resources win these tournaments, but sometimes the little countries beat the big countries. 

Uruguay, a country of 3 million people, beat perennial powerhouse Brazil, a nation of 215 million. Or the Netherlands, a country smaller than West Virginia, finds itself in the final stages of the European Championship. These countries find unique ways to play the game or, in some cases, reinvent the game to beat the more prominent opponents. 

This is not dissimilar to smaller companies. They must be creative with their resources, innovate and create, and deliver superior customer value. They may not consistently beat the more prominent companies, but they are the up-and-comers finding new ways to build wealth for their shareholders. Think Tesla from many years ago or the cyber security company CrowdStrike today, small companies that have grown and are creating change and innovation. We continue to invest in them and believe they have a big opportunity in the future.

For the Remainder of the Year

While it is fundamental to investing to assess where we are and where we have come from, the second half of 2024 may be more challenging than the first. We recently had elections in the U.K. and France, there is a U.S. election on the horizon, along with geopolitical risk, and the Federal Reserve at a crossroads. 

With all those factors, here are some of the things your Charter Oak team will be diligently monitoring for the remainder of the year:

Interest rates. Could they stay higher for longer? At the start of the year, the market expected between 3 and 7 rate cuts; the consensus is now for maybe one or two. 

Why is that? Inflation has proven a little stickier than expected, and the U.S. economy and labor market have remained strong. This has given the Federal Reserve time to pause and wait for future data. We will monitor this closely, as it will impact our clients in terms of the yield they will get from their savings accounts and the loan rates for cars and homes.  

Magnificent Seven. As discussed, Artificial Intelligence spending and these technology stocks have driven the market forward. When will some of the steadier value companies lead the way? When rates do come down, will our small and mid-sized companies do better as their cost of financing decreases?

International investing. Can France and Germany lead the Eurozone into economic expansion? Is Japan finally rounding a corner after decades of slow/no growth? Can emerging market economies, specifically India, transition their economies? 

The U.S. election. We will have much more to say on this in the coming months, but one of the things that gives us great confidence is being stewards of your money for decades. This long-term investment approach serves investors well and has been proven to maintain and grow wealth. 

Your Charter Oak team will monitor these trends and more all summer. We hope you have some time to enjoy the Olympics, summer vacations, and time with family and friends.

As always, it is our pleasure to serve you. Please get in touch with the Charter Oak team if we can help in any way.