[Market Recap] Cup of Joe: May 2024 Market Update

Markets in May

• Headlines have dominated the market the past two months and the week-to-week market direction has been manic.
•  $10,000 invested in the S&P 500 in 1970 grew to over $2.6M at the end of March 2024, ignoring fees and taxes.  During that period of time:
• • From 1965 to 1981 the top marginal tax rate was 70%.  Only after 1987 did it come down under 40% where it has been since.
  • Interest rates were above effectively above 5% from 1972 to 1991.  Almost 20 years, during which the market was up almost 8x!
  • Price Corrections (a 10% decline in the index level) happen, on average, every 22 months.  We usually don’t even make it 2 years without a bumpy drawdown.
  • There have been 8 US recessions since 1970 an average of 1 every 6.6 years.
  • This period of time is littered with headlines both bad and good: terrorist attacks, war, natural disasters,  the birth of the personal computer, the fall of the Berlin Wall, and the invention of the iphone.  But the point is that the market perseveres.

• We find ourselves in a time where things are generally ok… Equity markets are positive, US GDP growth is positive, unemployment rate is still really low.  We are just experiencing a lot of mixed signals which can sometimes be confusing and unsettling for investors.
• Headlines cause short-term movements

• • 2023 was a great year but it wasn’t a straight line to +26%.
  • Also, when stock prices advance a lot, they take a breather.  And that’s what we saw with the market in April.
  • Think of headlines as tea leaves.  Don’t look at any one of them as the thing that’s going to change everything.
  • Staying invested is the most important thing you can do.

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Joe Gallemore, CIMA®, Partner
Director of Investment Management

[Market Recap] Cup of Joe: April 2024 Market Update

Markets in April

• March saw stock markets rise again with the S&P 500, NASDAQ, and DJIA indexes all closing Q1 at or near all-time highs. But there’s a lot going on underneath the surface.
• A lot of economists and strategists have been predicting a slowdown in the US economy, instead it’s almost been the opposite of that. Many data points are coming in showing the US economy continues to be strong and resilient; at the same time the Fed is saying they will not cut interest rates before they are convinced of the inflation data.
• This tug of war is causing persistent volatility week to week. And this past week, the S&P 500 had back to back days of 1% moves in opposite directions.
• Nowadays the stock market is reacting to every little thing. The best thing to do is buckle your seatbelt and be patient. And in today’s stock market turbulence can come from a myriad of places. But as we’re seeing this year, even through pockets of volatility, the market will rise on positive news. And the labor market, US consumer, and economy at large have all remained unexpectedly strong.
• Keep in mind that this stuff is impossible to predict. The market is sensitive right now and we think simply knowing that can help you stick to your investment plan, by not overreacting when the market over reacts.
• Investing is hard, due in equal parts to 1) not knowing what’s going to happen, and 2) having to live with the uncertainty. Too many bad investment moves are made when an investor can’t calmly handle an emotional response to short term volatility and instead remain patient. And all volatility is short term.
• So as the Macro landscape continues to change, if the market remains choppy, which we think it will, remain patient and confident. These environments typically present very good opportunities for active stock strategies and provide us good opportunities for rebalancing.

Joe Gallemore, CIMA®, Partner
Director of Investment Management

[Market Recap] Cup of Joe: March 2024 Market Update

MARKETS IN MARCH

The connection between stocks & interest rates.

• Stocks have an inverse relationship with interest rates. When rates are rising, that is seen as a headwind for stock appreciation.  And the opposite is true, when rates are falling that is typically good for stock prices.
• Further, interest rates almost always move in cycles. They trend one way and then trend the other way, like a pendulum.  They don’t alternate in rapid succession.
• Now that rates have stopped moving the “bad” direction for stocks, and we’re waiting for them to start moving in the “good” direction, in our opinion there’s really only one thing that a long-term investor should be focused on, methodically moving cash or safety assets back into equities.
• Also, when interest rates are cut, not only is that a tailwind for stocks, but what happens to the savings rates on your cash? Those go down, too. So when probability tells you stocks should go up and savings rates should go down, what seems like the smart move?

We saw this relationship play out in the markets in February. Anticipation of the Fed’s first rate cut encouraged money to go back into risk assets.

• US stocks, small, mid and large alike, were up about 5% in the month. And Emerging Markets were also up almost 5% as well.
• The boost in stocks, however, seemed to be at the expense of bonds, which dipped about -1.4% in February. However, with many bonds and bond funds still yielding over 4% and the expectation of multiple interest rate cutes this year, the return outlook for bonds is positive.

 Highlighting a couple of law changes in 2024:

• Gift Exclusion Limit was raised from $17,000 to $18,000. This means you can gift $18,000 of cash or securities to someone without reducing the amount you can pass along tax-free in your Estate.
• The contribution limits on all kinds of Retirement plans also went up this year. The most widely used would be accounts like 401Ks & 403Bs (this includes Thrift Savings Plans).  The contribution limit on these went up to $23,000 for 2024.  Other types of accounts such as Regular & Roth IRAs, SEP IRAs, SIMPLE IRAs all had contribution limits go up this year.  As did the catch-up contribution amount you folks over 50.  So be sure to ask your advisor or tax preparer if you can take advantage of these increases.

Joe Gallemore, CIMA®, Partner
Director of Investment Management

[Market Recap] Cup of Joe: February 2024 Market Update

MARKETS IN JANUARY

Asset classes were mixed in January.  US large cap and Intl stocks were slightly positive, while mid and small cap stocks gave back some gains from Q4.  Bonds held steady close to even with an income yield still above 4%.

Economy seemingly on good footing

Economic output is strong. GDP exceeded expectations for both Q4 and 2023.

Employment is staying strong as well. Jobs Data far exceeding Wall St expectations.  Economy has added over 750,000 jobs in the last two months.

What the Fed is watching is close to the range they want.  Fed’s preferred inflation measure is starting to stabilize near a level they’ve been targeting.

Let’s greet this positive data with cautious optimism. There are still many cross-currents moving beneath the surface of the stock indexes that signal a slowdown is still very much a possibility.

Managers of the strategies we use like to focus on quality companies that manage debt well, have competitive advantages in their business models, and have resilient streams of cash flow.  So in an environment where interest rates are higher and consumer spending may slow down, owning businesses with very strong fundamentals is a great position from which to start.

What do we focus on now?

Putting cash to work

MMKT funds are very short-term vehicles and are among the first things to lower payouts rates when the Fed eventually cuts interest rates.

The Fed doesn’t even need to cut rates for the payout to decrease.  The expectation of rate cuts starts to get baked into the prices in the short term bond market and will start weighing on the yield of your savings accounts.

Rebalancing your investment accounts

We’ve been rebalancing the assets we over see for you.

If you got more conservative in your 401K, 403B, or Thrift Savings account, don’t forget about it and let it sit there.  Make sure to rebalance it back to your long-term target allocation.

Still expect volatility. And along with that, expect some of the unexpected.

Now is the time to be disciplined investors, and be comfortable with some uncertainty, while keeping your eyes on the growth to be had once things really improve.

Joe Gallemore, CIMA®, Partner
Director of Investment Management

[Market Recap] Cup of Joe: January 2024 Market Update

Well 2023 is history, and what an interesting year it was.  

• Wall St started the year with an overwhelming consensus that recession was imminent.
• The Fed hiked rates 4 times this past year but has paused since August.
• The S&P 500 ended the year with the Top 10 names accounting for 32% of the index! And were responsible for 86% of the return (according to JPMorgan).

Review of 2023 

• Hot out of the gate: Fed ended 2022 with its first decline in rate hikes, so investors started looking farther down the road.
• Regional Banking ‘crisis’: Lasted about 5-6 weeks
•  Spring/Summer acceleration: Lead to a Frothy market, where stock prices were way ahead of fundamentals.
•  3 Month Lull: the economic data started to catch up and suggest that risk of recession was still substantial. The Fed first paused rate hikes and started talking about keeping rates higher for longer.
•  Nov/Dec Rally: Persistently positive economic data continued to roll in and the equity and bond indexes reaccelerated sharply.  The big distinguisher this time though, is that the rally was seen across the board, not just in a handful of stocks.
• Summary: There were 5 main segments to market performance last year but each one was peppered with sharp reversals in the direction it was trending at the time.  These relatively short pockets of volatility can feel unnerving, they are confusing, and they invite doubt as to whether changes to the plan need to be made.

What’s ahead in 2024?  No one knows, so stay invested!

• Recession is still possible but is less likely than before.  Opinion on market return varies widely.  No one predicted a 2023 of +26% containing a -10% drawdown and the 2^nd, 3^rd, and 4^th biggest bank failures in US history.
•  If inflation continues to stabilize, its expected that the Fed will start cutting rates in small increments. This would be a big positive for markets and the economy.   But rate cuts are not promised and there are several factors that could cause the Fed to pause for longer.

 One key thing is to stay invested. 

• Even if the Fed is in wait and see mode, the market will likely operate in fits & starts as the economy tries to get going again.
• Geo-political tension is high right now.  If these tensions were to take sharp turns, it indeed may cause the market to hiccup.  One thing that’s a fact is that markets persevere through geopolitical events.
• The Fed may be done raising rates. Unexpected fallout from high rates may reel its ugly head again.  External events, totally out of the blue, might pop up as they always seem to do.
• This is just a friendly reminder to stay the course no matter what. Missing only a few days of good returns can significantly affect your long term outcome.  Staying invested is always the way to go.

Principles for 2024

• Have another look at your company retirement plan and share details with your advisor.  How much you contribute and when(!) can make a big difference.
• Don’t jump to make investment changes.  A calendar year turnover is a psychological trap when it comes to your portfolio.  Investing exists on a continuum, which moves in cycles.  We did rebalance portfolios twice in Q4 to position for the road ahead.
• Reminder, IRA contributions for 2023 can be made up until you file taxes.  So if you haven’t done that, you maybe still can.  If you’re unsure about eligibility, ask us.
• Savings rates are great now, but these are not expected to last forever; and yields on money market funds are the first to decline when the rate cycle turns over.  So lets get together and strategize about putting excess cash to work in a more sustainable plan.

Joe Gallemore, CIMA®, Partner
Director of Investment Management

[Market Recap] Cup of Joe: December Market Update

1.   2023 has generally been a good year for equities, but be mindful of index concentration

 
2.   Great time to be diversified

So though a prudently balanced portfolio has faced challenges in recent years, the current outlook for diversification looks promising.

 
 
3.   Takeaways from our Investment Committee

Joe Gallemore, CIMA®, Partner

[Market Recap] Cup of Joe: November Market Update

Recent Investment Focus webinar with the St James Investment Co.
We talked about how interest rates affect stocks, about the Magnificent 7 making the S&P 500 more concentrated than it’s ever been, and we talked about St James’ patient, time-tested approach to value investing and how owning great businesses helps clients in the long-term. Watch at your convenience at ArgentBridge.com.

Financial Planning Year-End Punch List – a few things you can do to help you work towards better outcomes

• Assess any changes – Make a list and bounce it off your advisor.
• Give your taxes a little thought – if you got/are getting a good bonus, made more than you thought, had some windfall income, let your advisor know.
• Review your budget for accuracy – Leads to better planning for the future
• Make sure your company retirement plans are fully funded!/li>
• Charitable giving – If you want to gift, to charity or loved ones, tell your advisor! There’s lots of giving strategies out there and we want to help you make the most of your generosity.
• Year-end not necessarily a time to shuffle your investments. Historically the months in Q4 and Q1 are relatively strong. Make that discussion a year-round one with Argent Bridge.
• I-Bonds – Is it worth owning?
• I-bonds purchased in the last few years may be less competitive than current US Treasuries that can be locked in.
  Each I-bond is different and the time it was purchased and the length it’s been held needs to be considered.
  If you have I-bonds, show them to your advisor, let us take a look and see if there’s a way we can improve your outcome.
• Focus on your spending- Maintaining your normal spending plan, when funded by distributions from your investments, eats up bigger chunks of your assets when the markets decline.  So adjusting your spending is a great way to improve your investing outcome.Thank you for your continued trust and partnership. 

  
  Joe Gallemore, CIMA®, Partner

[Market Recap] Cup of Joe: October Market Update

Equity markets finished the 3rd quarter on a two month skid. Rising oil prices and interest rates were the main culprits for this.

Looking back, this feels like a market that got out over its skis up through July and spent the last two months back pedaling to more reasonable expectations. The stock market is focused on how long interest rates may remain high and when the tightening effects of that will start to alleviate. Things like mortgage rates declining and what the squeeze on corporate profits.

What do market statistics mean to you?

• Timely perspective and why it should matter to you:
  Today’s S&P 500 level takes us back to 5/3/2021.  The trailing return for the 2.33 years since then is flat, excluding dividends.And in fact, the index is still down approximately 11% from its peak in January of 2022.  Still not back to where we were pre-pandemic and pre-rate hikes. When you hear these sound bits on TV you should think, “Does this apply to me?”
• Index concentration: The top 5 names of the S&P 500 amount to a whopping 24% of the index; the top 10 names account for 31%!.  At one point this year, the top 7 stocks were responsible for around 80% of the Index’s return.
• Unless you owned only those 5-10 stocks, then you’re not going to experience this. Unless you owned only the index, you won’t experience this.  And never would we recommend you focus your portfolio in 10 stocks or even one single index fund.
• Last time interest rates were this high was in July 2007.  This is a market environment most people are not used to.
  Why is that important? Because the Fed’s actions have an enormous impact on how markets behave and, thus, your portfolio.  The Fed began raising interest rates last year and volatility was rampant.  But before this, a rate hiking cycle of this scale was so long ago that it seems people forgot what this feels like.
• Many economists are referring to today’s levels as “back to normal interest rates”. Hopefully this means that the Fed can make adjustments without causing massive price dislocations, which is what happens when rates sit at such an extreme (0%!) for such a long spell. The Fed has said they intend to keep rates higher for an extended period of time, so investors should reset their expectations and think of this as the proverbial New Normal, at least for a while.
• What a recession may mean for your portfolios.
  Volatility experienced in a recessionary market is typically good for actively managed strategies. It allows for what’s referred to as price discovery- where the market price of a stock is lower than what is implied by the fundamentals of the underlying company.  Active managers love to pounce on these opportunities.
• Typically, asset allocation has a more pronounced impact during and out of a recession.  For example, small & mid cap US stocks tend to do very well and often outpace large caps, coming off the bottom of economic cycles.  Growth, particularly Tech, stocks should have less of an oversized effect. Bonds historically have acted as a stabilize. Hopefully we see this as the Fed nears the end of the hiking cycle.  In the mean time, savings rates are providing a nice return to weather the storm, per se.
• Focus on your spending- Maintaining your normal spending plan, when funded by distributions from your investments, eats up bigger chunks of your assets when the markets decline.  So adjusting your spending is a great way to improve your investing outcome.Thank you for your continued trust and partnership. 

  
  Joe Gallemore, CIMA®, Partner

[Market Recap] Cup of Joe: September Market Update

Stock Markets cooled off in August

The August decline seems to be not such a bad thing. Not a good thing, per se, but good in the sense that it may be healthy for the market.  Staving off the proverbial irrational exuberance and keeping expectations in check.

• The S&P 500 was +20.6% through July 31st.  On pace for a calendar year return of +35.4%. That has happened only 5 times since the Great Depression, and the last time was in 1958. So a year like this would be exceptional.

In our opinion, one good thing about the market repricing in August is that it seemed to happen on its own, it was not caused by any surprise headlines or negative reports.

• The August cool-off also happened with a very average amount of volatility, average by historical standards.
• Except for a three-day period right in the middle, the daily moves were mostly in bite sized chunks, which is nice to see.  This is also good for the investing mentality, because it keeps the financial media quiet which prevents either our Fear or FOMO reactions from flashing red.
• A market moderating itself on its own isn’t always a bad thing because it keeps expectations in check and mitigates the amount of emotional frenzy we experience.

What this August performance could also be signaling is that the Fed is still in the driver’s seat. Market participants were seemingly watching the data roll out and gauging the potential signaling of if-you-give-a-mouse-a-cookie will it end up with the Fed hiking rates more or pausing for a while.

A big positive right now is:

• Job market has remained strong and the Unemployment rate has remained low.
  Employed workers fuels spending which fuels corporate profits.
  Corporate profits are the main driver of long term stock prices.

Thank you for your continued trust and partnership. 

Joe Gallemore, CIMA®, Partner

[Market Recap] Cup of Joe: August Market Update

Stock indexes posted strong gains in July. US Large cap and International stocks were up over 3% and US Small Cap and Emerging Market stocks were up more than 6% during the month. Primarily led by the Fed’s pause on interest rates in June, and the continued trickle of positive data on the economy. 

In the first half of the year, performance of the S&P 500, and arguably the market at large, had been dominated by large tech stocks.
Large Growth stocks have been on a white hot tear this year returning over 33% in the first 6 months.This started to turn over a bit in July.The S&P 500 Equally-Weighted Index returned slightly more than the traditional S&P 500 Index in July (3.5% vs 3.2%). This performance shift is a good thing for diversified portfolios because it means that a broader range of stocks performed well, as opposed to a small few.  
 
The “so what” of all this. How does this apply to me?
Not focused on growth or large growth. This, like everything else, goes through cycles. It has been in favor in recent history because of suppressed interest rates. Large Growth was -30%+ in 2022… because interest rates went up, fast.
 
Diversification:
A portfolio of 60% SP 500 & 40% Barclays US Aggregate Bond indexes is +13% year to date. According to JPM, a broadly diversified allocation of about 8 different asset classes is +10.7% YTD as of 7/31.The goal of diversification is not keeping up with a specific equity index.If you’re retired or in the later innings of your career, you’re going to have exposure to bonds, for income and risk control. Bonds are up barley 2% this year because they’ve been going through a rate hiking cycle and inflation (a bond’s worst enemy) was generationally high last year.
 
So,Knowing you have a diversified portfolio…
When you hear, “The NASDAQ is up for 13 straight days!” know they’re not talking about you.  When you hear, “Equities are favored to bonds!”, just think to yourself “well I use bond to control risk in my portfolio, and they’re now paying me more than they have in 20 years.” And when you hear talking heads explaining why pockets of the market are ripe for bursts of performance, just remember that market timing has been all but proven impossible, and pursuing it is a fools errand.
 
Thank you for your continued trust and partnership.