Commentary

As the Olympics play out in Paris this summer, we can witness extremely gifted athletes excel in a countless number of events. As usual, special attention is given to the high-flying gymnasts that can stick incredible landings. On Wall Street, the most important landing of late is whether the economy can have the elusive “soft-landing” after a stretch of Fed tightening and higher interest rates. With the economy only adding 114,000 jobs in July and the unemployment rate moving up to 4.3% (after bottoming at 3.4% last year), there has been some recent concern for the economy, reflected by a relatively short, but dramatic, sell-off to begin August.

We believe that the soft-landing scenario is still intact as the economy continues to prove to be quite resilient. First, profit reporting from the previous quarter has been strong, with earnings up about 10.9% from a year ago. This gain in earnings appears to be driven by margin expansion as opposed to revenue growth. Also, according to JPMorgan, 8 out of 11 sectors are expected to contribute to this earnings growth, led once again by AI related capex. Finally, the Fed has indicated that they are ready to lower interest rates beginning in September, which has historically given support to equity prices.

On a cautionary note, inflation looks to be rather persistent with several initiatives that could promote higher costs. The deglobalization of industry, bringing manufacturing back home, typically done using aggressive tariffs, may be inflationary. Transforming our energy and infrastructure could also be seen as adding costs for the nation. Inflation is an insidious tax on the middle and lower classes, and there has been some cutting back from consumers. Recent earnings from McDonalds, Starbucks, and Chipotle for example, indicate that people are budgeting more and that may eventually affect the overall economy.

Seven months into the year financial markets continue to stride higher led by the Nasdaq (+16%) and the S&P 500 (+15%). In general, fixed income is positive for the year now, if just barely. As we deal with many geopolitical headlines in the weeks and months to come, it is as important as ever that investors establish a game plan to not only meet and exceed personal goals, but also to manage risk and expectations that can keep the plan on track.

“I don’t really think about the degree of difficulty or the possibility of making a mistake. I just try to relax and let my preparation and training take over.”

— Simone Biles

Should I Roth or should I go now? Wall Street is humming a variation to the iconic Clash hit from 1981, as the potential arises that tax law changes made in 2017 get set to expire at the end of 2025. The basic idea is this, should someone consider paying taxes now by converting qualified retirement assets into a Roth IRA, to save a significant sum of taxes over a long period of time. Advisors are having this conversation in offices across the US. In fact, Barron’s recently noted that Fidelity has seen a 44% increase in conversions year over year at just the end of the first quarter. We believe that the pace of conversions will continue to expand, and the following example could help explain why…

For many retirees, the time frame between full retirement age (around 67 years old) until Required Distribution Age of 73, are years with potentially less tax burdens. At 73, the qualified and required distributions can loom large tax wise. That leaves the potential for converting assets before age 73 at least worth considering for many. Combining that with the new rule with respect to non-spouse beneficiary distribution requirements, there is an estate planning angle to this as well. It may not be a “train in vain” to explore the tax implications of converting assets to a Roth.

As for markets during the first third of the year, Wall Street continues to ride the AI wave and generally strong economic data. After a blazing start in the first quarter, stocks have come back to earth recently, in part because of stubborn and sticky inflation. The inflation data is holding the Fed back from lowering rates as Wall Street has reversed course from a predicted seven rate cuts in 2024, to now possibly one or two later in the year. The yield on the two-year just traded above 5% again. We continue to favor companies that are profitable, carry low debt, and that have pricing power. These are the names that could potentially do well during an inflationary period. We are still recognizing good diversification opportunities in international markets.

Finally, we have begun to move out the yield curve as rates have inched higher, but the threat of a massive rise in rates may be less probable. As for the upcoming election (and other geo-political events), the markets seem to be unfazed for now, drawing on experience that investing based on headlines can be an expensive political science course. We look forward to connecting with everyone personally throughout the year and we appreciate your confidence in our firm.

Every New Year begins with resolutions, future predictions and forecasts, and a clean slate. As investors, we try to be aware of the daily gyrations of both the economy and the markets, as well as long-term trends. By comparison, a good meteorologist reports on the weather today and for the next five days. A great meteorologist is looking not only at what is currently happening, but also studying major potential trends, like climate change, and making decisions based on a long-term view. To be a great investor then, we believe that you need to combine the fundamental analysis of all current and historical data, with the curiosity and experience to make enduring, multi-year decisions, with a grounded anticipation of the future.

Thanks to our friends at Wealthmanagement.com, we need to be cautious with what the financial media offers in the way of predictions. Based on a study by CXO Advisory Group, the so-called gurus were no better than a flip of the coin, they were worse. From 2005 to 2012, they reviewed 6,584 forecasts from 68 “experts” only to find that on average they were accurate less than 47% of the time. Only 5 of the 68 had an accuracy score above 60%. And no, Jim Cramer was not one of the five (he came in at 47%). Our key takeaways are these…First, any market related predictions for the short term are purely for entertainment purposes only. Secondly, we need to make calculated forecasts for our long-term investments, but we also need to build portfolios using concepts like diversity, income investments, risk management, etc. so that we can survive the short-term periods of market volatility that the breathless “talking heads” cannot seemingly get right.

With that said, here is some of our insight as we head directly into 2024. Stocks managed to rebound quite nicely in 2023 and in mid-January 2024, the S&P 500 was able to regain all-time highs from 2 years ago. Even with relatively high US stock valuations, we believe that the economy is strong, strong enough to have a soft landing from recent rate hikes, and that the path of least resistance for equities may be higher for now. During the last quarter of 2023, the 10-year bond (risk free rate of return) had a dramatic fall in rate from a bit over 5% to 3.8%. As we closed out the year, the Fed appeared to be done lifting rates for the time being. While there will most likely be some rate cut by the Fed in 2024, we think just the “idea” of Fed cuts, will give some ballast to both bonds and stocks this year. As for volatility, world events and the upcoming election will most likely cause some market reactions. We again remind investors that Wall Street sometimes reacts counter to what the endless headlines might suggest.

We look forward to working with everyone again this year and for many years to come. Our goal is to become a trusted financial planning and asset management partner that not only guides you, but also helps to manage against those things we cannot control. “Climate is what we expect, weather is what we get” Mark Twain. Thank you for your continued confidence in our firm.

On October 21^st, the Wall Street Journal featured an article bemoaning, “Your Investment Strategy is Broken, the End of the 60-40 Strategy”, in reference to the time-honored allocation of 60-40, or 60% equites to 40% fixed income.  Just about one week later, the WSJ’s sister publication, Barron’s, had a cover story “Time to Buy Bonds”, which would leave one to believe that the 60-40 strategy is about to begin a new fresh start.  So, in which direction is an investor or money manager to lean… Let’s first take a trip down memory lane…

Beginning in the late seventies, or about forty years ago, interest rates began falling from record highs after the Fed had raised rates to combat inflation amidst an energy crisis.  The next thirty years witnessed an unprecedented bull run in both bonds and stocks, even with occasional disruptions, like the dotcom bubble in 2001 and the credit crisis of 2008.  And it was in these crisis moments where the 60-40 shined brightest.  In 2008 for example, a 60-40 mix outperformed a straight stock portfolio by 23%, offering investors not only income but also an easier path back to profitability.

For the past 12 years though, as the tired bond bull was fed dose after dose of government intervention, interest rates were kept at or near zero percent.  Stock prices and other risk assets were huge beneficiaries of this constant flow of easy money and then a pandemic ultimately paved the way for monetary craziness.  We would suggest then that the 60-40 strategy first broke and then ended about ten years ago, and the anemic returns for bonds, (the US Aggregate bond index has returned on average less than 1% a year over the past ten years), were overshadowed by the heady gains in equities over the same time.

Last week the 10-year Treasury hit 5% for the first time in about 16 years.  Fixed income is now once again, a legitimate investment choice.  After what looks to be the third down year in the bond market, which by some measures is the worst stretch since the 1700’s, bonds, or the 40%, look to be poised for a potential rebound as the risk reward picture becomes clearer.  The attributes of having fixed income in a portfolio, income generation, lessening of overall account risk and volatility, and potential appreciation in times of economic stress may finally be back in play.

Stocks for their part should continue to benefit from a relatively strong economy, full employment, high and sticky inflation, and innovation (think AI).  Conversely, geopolitical events, high valuations, and extended credit are just a few of the dangers to the market lurking in the shadows.  Our goal is to go into the corners and into the shadows to manage risk.  We will also go to the bright spots of opportunity to help you achieve your financial goals.  We appreciate your business and look forward to working with you in any way we can in the years ahead.

Do you remember your first time? The words awkward, exciting, and clunky come to mind. The fear of the unknown is only surpassed by the seemingly unlimited future reward. We of course are talking about the internet…

The sound of the AOL sign-in, floppy disks, paying for online minutes…that was the beginning of the internet. The internet in the mid 1990’s was awkward, exciting, and clunky. On some level, we all knew it would radically change our world and thirty years later, it has, as we are basically carrying our entire lives in our pocket.

Silicon Valley, and then naturally Wall Street, are both showing the same level of almost hysteria about the great expectations for Artificial Intelligence (AI) as they did for the internet. Is it the next really big thing? It is early in the game, and current applications are far from perfect, but the key words are compounding, speed, and generative. Data is being processed at incredible multiples and speed. Picture the 173 million items contained in the Library of Congress accessed in literally seconds to render a decision. Consider facial recognition to diagnose strokes and other diseases. Imagine genetic testing for new life saving drugs and procedures that could knock years off the approval process. Finally, electric vehicles are obviously top of mind right now, but AI has already begun to transform agriculture, logistics, and a wide array of ever day functions in dramatic fashion.

The point is, as investors we need to overlay the huge potential effects of AI on society, both good and bad, as we develop our investment plans. Like the magic of compounding our investments, the compound effect of generative data and information management is happening right now. Sir Francis Scott Bacon, “Knowledge itself is power”.

For the first quarter of 2023, volatility continued but we were able to see some bounce-back gains across the equity board on the heels of what was a brutal prior year. For the record, Nasdaq stocks paved the way, gaining about 16.9%, followed by the Russell 1000 Growth up 14.2%, the large cap S&P 500 gaining about 7%, and the venerable Dow basically unchanged. Of note, and piquing our interest, the developed international markets had a strong showing to begin 2023, benefiting from lower-than-expected winter energy prices, a positive interest rate environment, China’s re-opening, and comparatively lower stock valuations.

We continue to monitor our portfolios to take advantage of current financial trends, including high short-term yields (inverted yield curve), potentially positive news internationally, and near record low employment rates. We appreciate your confidence in our firm, and we look forward to helping you navigate the financial scene for many years to come. Finally, while looking at the current state of AI, we are reminded of a quote by author James Surowiecki, “The history of the internet is, in part, a series of opportunities missed.”