Stock Market

Increased Volatility Sometimes Happens in Election Years

2024 Q3 Economic Commentary…

Election years are often marked by increased volatility. Investors are generally uncertain about potential policy changes and their impacts on various sectors. This uncertainty can lead to short-term fluctuations in stock prices. This is especially true when the election outcome is still highly unpredictable.

In many election years, a pre-election rally has occurred, particularly when the market anticipated a favorable outcome for business-friendly candidates. For instance, the Dow Jones Industrial Average saw significant gains in the months leading up to the 1984 and 1996 elections, reflecting investor optimism.

Future BrightIncreased Volatility Sometimes Happens in Election Years
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2024 Q1 Market Commentary…

For some portfolio managers and investors, the desire for Fed interest rate cuts is akin to that of a sugar addict’s desire for his or her next candy fix. Both are signs that there are greater problems afoot. I’ll stick with the interest rate discussion since I’ve been known to enjoy one too many desserts, and I don’t qualify as a pillar of optimal health.

An interest rate cut is done for one of two reasons (or both): 1) to stimulate a weak economy; or 2) to dig an economy out of recession. Money is less expensive to borrow when rates go lower, which allows consumers to consider more and bigger purchases. In terms of credit, lower rates increase purchasing power, which can have a ripple effect as it stirs up more economic activity. Nevertheless, a rate cut is still an admission that the economy is not in good health. The reality is just because we have more credit capacity to work with doesn’t mean we should use it. See for reference.

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Are you onboard with the A.I Supercycle?

Seldom do I write in between my typical quarterly cycle of economic commentaries, but I feel compelled to do so today. Do you know what an economic “Supercycle” is? Depending on how old you are, you have witnessed at least one or two in your lifetime, and some of you have witnessed more. An economic Supercycle is a sustained period of expansion usually driven by robust growth in demand for products and services. (I pulled that definition from a Google search, which now seems so antiquated considering what lies ahead.)

Examples of macroeconomic Supercycles include the industrial revolution in the late 1800’s and the information technology revolution of the last 25 years, just to name a couple you are familiar with. For investors, Supercycles are economic tsunamis of innovation that create significant wealth opportunities for those who can both see it coming (but may not be able to define or describe it) and who are willing to risk their investment dollars to benefit from it.

Future BrightAre you onboard with the A.I Supercycle?
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Let’s get on with it, 2024

2024 Q1 Market Commentary…

The market finished off Quarter 4 of 2023 on a welcomed high note. Stocks and bonds got a significant lift from the talk of disinflation and potential interest rate cuts in 2024. The most overused term in finance – “soft landing” – is still the hope of investors going into the new year.

Speaking of the new year, I saw the perfect meme to describe, perhaps, the collective feeling of every American heading into 2024. It is a picture of a tiger laying in the grass enjoying a deep sleep until into the picture enters a man who sneaks up on the tiger ready to finger flick its tail. The caption reads, “Let’s get on with it, 2024.” Sometimes, a picture is worth a thousand words.

Managing assets through a macroeconomic lens should always garner the most attention, but there is a penchant from investors to try to predict market moves through the lens of politics in presidential election years. We hear the questions repeatedly on financial news networks day after day heading up to election day.

Future BrightLet’s get on with it, 2024
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Feeling Weary?… Then Zoom Out!

2023 Q4 Market Commentary…

Rising interest rates lower the present value of future earnings for companies, which can cause stock prices to decline. Furthermore, the attraction to own fixed interest rate investments like CD’s and money market funds vs. stock market investments increases as interest rates move higher. Fixed interest rate investments tend to move in tandem up and down with inflation rates while stocks often act inversely.

The S&P 500 reversed lower this past quarter due to rising interest rates in addition to several other factors including consumer and commercial credit tightening, reduced personal savings rates, weakening housing data, geopolitical uncertainty, commercial real estate default risk, higher gas prices, to name a few. Still, there doesn’t seem to be a sense of panic in markets, but there are signs of exhaustion. Many of the mega cap growth stocks that buoyed the stock market performance in the first quarter of the year started to wane, as the NASDAQ was the weakest performing sector in Q3, albeit still up significantly for the year. Here are the numbers:

Future BrightFeeling Weary?… Then Zoom Out!
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Don’t Get Too Irrationally Exuberant

2023 Q3 Market Commentary…

As an experiment, I took a crack at letting ChatGPT write this quarter’s market commentary. It was quite impressive how quickly it built the page. It took less than 30 seconds! Then, I read through it, and I was reminded that speed is not a substitute for accuracy. In the section regarding U.S. markets, it stated that market indices were at all-time highs, which is woefully incorrect. None of the U.S. stock market indices have regained their high points set back in late 2021. Next, it wrote a paragraph citing climate change and how renewable energy stocks are benefitting from accelerated acceptance and supportive policies. In fact, the most widely held clean energy ETF, iShares Global Clean Energy ETF, is down mid-single digits year-to-date in percentage terms so far in 2023. Suffice to say, artificial intelligence has some room for improvement.

Due largely to AI and cloud computing enthusiasm, the NASDAQ recorded its best start to the first half of the year since 1983. Yet, we quickly forget how far down these stocks fell in 2022. For example, META (aka Facebook) stock is currently trading around $289/share as of this market commentary, which is a whopping 141% year-to-date return. On September 1, 2021, META hit its all-time high price of $384.33. So, even with its meteoric rise this year, META is still off 25% from its all-time high price. This is not typical price action for any stock, let alone a large cap stock. When you consider that the historical average annual rate of return for the S&P 500 Index from years 1993 through the end of 2022 was 7.52%, the trajectory on such large stocks seems both unpredictable and unsustainable. META is just one example. There are a handful of other large cap stocks that have been similarly irrationally exuberant. You can guess, by reviewing the following table, which area of the market benefited most. Here are the 1st half results of the major indices…

So, how do we approach an irrational stock market with so few stocks generating such abnormal returns? We own a measured amount of some of those names either individually or in ETF’s, and we are very tactical with the rest of the portfolio. One asset class that has been beneficial in reducing overall portfolio risk has been treasury bonds. We’ve been able to purchase treasuries that are producing yields not seen in over a decade. Owning treasuries at higher yields tamps down the inordinate risk of current markets. If the Fed continues to aggressively fight inflation, we should continue to see attractive short-term yields on treasuries, and we’ll continue to reinvest into them as they reach their maturity dates.

We anticipated a more challenging 2nd quarter for equities, but the stock market stayed resilient. It is still a very narrow market, which means just a handful of large stocks continue to do the heavy lifting for market returns. Is it possible for a dozen stocks to hold the market up for an extended period? It’s possible, but not probable based on predicted corporate earnings for the second half of the year.

Future BrightDon’t Get Too Irrationally Exuberant
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“Risk happens slowly…then all at once.”

2023 Q2 Market Commentary…

Approximately 50% of the NASDAQ 100 Index is concentrated in just seven stocks – Meta, Apple, Google, Microsoft, Amazon, NVidia, and Tesla. These seven stocks had a solid quarter in performance terms, yet only Apple stock is trading anywhere near all-time highs set back in the fall of 2021. Perhaps, these seven stocks were viewed by investors as a “safe haven” amidst a broader stock market that does not look much healthier than it did in all of 2022.

Tens of thousands of employees were let go by these seven companies and others in the first quarter of 2023. Job cuts can provide a boost to the company stock price, but it’s a strategy that only helps the bottom line, not the top line. It’s the top line (gross sales and revenue) that matters most, and the next wave of quarterly earnings this spring could paint a dismal picture across many companies and sectors. Nevertheless, for at least the first quarter, tech stocks gave the market some relief. (See Q1 2023 performance chart below)

Quarter 1, 2023 Performance Chart

Future Bright“Risk happens slowly…then all at once.”
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What’s In Store for 2023?

2023 Q1 Market Commentary…

The $1.7 Trillion bipartisan spending bill pushed through by Congress at the end of the year was a kick to the gut for investors who were hoping we’d see inflation abate more quickly. A leading research company, Hedgeye, describes it best saying, “We remain in a new, higher inflation volatility regime brought on by deglobalization, confounding energy policies, war, and a wholesale disregard for fiscal prudence at a time of record government indebtedness.”1

2022 was a slog of gradual, but continual stock and bond values erosion. With the lone exception being the energy sector, every other U.S. stock sector finished 2022 in the red.2 Unfortunately, bonds didn’t provide any shelter either, as yields spiked in the middle of the year, causing bond values to drop significantly. Let’s call it what it was – a “woodshed year”.

1st Quarter Picture of Net Returns

Future BrightWhat’s In Store for 2023?
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Managing a Bear Market

2022 Q4 Market Commentary…

From the June 15 lows, the stock market experienced a relief rally lasting one full month before falling back to re-test its lows of the year by the quarter’s end. These are the moves typically experienced when a market is under duress – often referred to as “bear market rallies” and “bear market selloffs”. Out of this volatility, a noticeable behavioral pattern develops among investors. When markets are fiercely advancing upward, investors catch a case of “FOMO” – the fear of missing out – and they want to be “all in”. Conversely, when markets are fiercely declining in value, investors get panicked and want to run for the exits. These traits only become amplified when these market gyrations occur on a day-to-day basis.

In 2022 so far, both the stock and bond markets have suffered greatly at the hands of inflation, slowing growth, and corporate earnings declines. Here are your year-to-date numbers:

Net Returns

Future BrightManaging a Bear Market
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Endure Volatility for Future Rewards!

2022 Q3 Market Commentary…

There are a lot of shoes dropping now on the U.S. economy that we have been forecasting in previous newsletters. Inflation is running hot. Economic growth, as measured by GDP, is slowing. Interest rates are climbing. Supply chain bottlenecks still exist. Gas prices remain elevated. Housing demand is cooling. Residential rental rates are climbing. Consumer credit is at an all-time high. Consumer confidence is weakening. You get the point. The list is long.

When markets are under extreme duress, the one question we all really want answered is “How much lower will the stock and bond markets go before we bottom out?” While we await the answer (which only ever reveals itself in hindsight), we are forced to grapple with the prospect that markets could get worse before they get better. To further complicate matters, we get brief rallies in markets – called “bear market rallies”- that play with our psyches and create more confusion about market direction.

In the second quarter, economic conditions turned on a dime for the worse. There is no sugarcoating it. The stock market showed it. The bond market showed it. In fact, the first half of 2022 was the worst performing first half of a year since 1970. Here are the 2022 first half performance numbers through June 30:

Future BrightEndure Volatility for Future Rewards!
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