07/2024 - Mid-Year Review
Full written article below.
In just a few days, we’ll be celebrating our Nation’s independence from England close to 250 years ago.
The Declaration of Independence led to the writing of the of the Constitution in 1787 which then set our Nation on a course as a Republic, if we can keep it, as Benjamin Franklin shared all those years ago.
And now as we fast-forward to today and looking at the Household Net Worth level, as reported by the Federal Reserve Bank, we’re sitting at 151 trillion. My personal belief is that this amazing growth of wealth is a direct result of individuals and entrepreneurs going to work, saving, investing, innovating, and creating in a democratically elected led, republic.
Happy Independence Day America!
I write this newsletter on June 28th, 2024 - it’s difficult for me to believe half of 2024 is in the books. As I sit back and think about the first half of the year, several items come to mind.
1. The U.S. economy continued to grow, albeit slowly. 1.4% in 1Q24 and a projected 2-3% in 2Q24 as cited by APnews.com
2. The U.S. equity market ripped higher with the S&P 500 jumping close to 15.5% in the last 6 months.
3. Overall economic growth was generally positive, no recessions, strong job growth, and slowing inflation has allowed the Federal Reserve to not cut interest rates.
4. Even without the Fed moving to cut interest rates, the equity market kept advancing, it seems to be on the backs of earnings and rising dividends. For example, according to FactSet, they are estimating that earnings gains for this year and next: 11.3% and 14.4%.
5. Earning and Dividends (or at least the potential for dividends), according to Jeremy Siegel in his book Stocks for the Long Run are what drive long-term equity values. Not the national debt, or the upcoming election between two lame-duck Presidential candidates, or the Federal Reserve, or the AI boom, or whatever the next “thing” is going to be.
It's with these observations in mind that I’m reminded of several conversations I’ve had recently with clients around Nvidia. Nvidia has been the darling of the stock market over the past year growing by close to 200% in stock value and the market cap of this one company is now at or surpassed the entire countries of Germany, France, and UK. source
Please hear me loud and clear that I am not advising anyone to buy or sell Nvidia, this is simply part of the conversations I’ve had over the past couple months.
The conversations with clients have largely centered around their desire to buy Nvidia. This is normal as we all want to buy “winners.” I think most of us would agree that we want to buy what’s gone up in value and then sell what’s gone down in value. Then, over time, rinse and repeat this methodology hoping for higher than “normal” market returns. The concept makes sense, right?
But did you catch the problem I just presented? The problem with the method of buying what’s gone up the most is that you’d now be buying a relatively “expensive” asset and the problem with selling what’s gone down is that you’d be arguably selling a relatively “inexpensive” asset. We always need to be reminded that price and value are inversely related.
I can’t think of any other area in our lives that we want to buy more of something when the price increases, however, the converse is true, most of us want to buy more when something is discounted. That is, unless we’re talking about broad market investing.
Buy low and sell high is incredibly easy to say, but it’s actually more difficult to pull off. Do you really want to sell your best winners and buy more of your biggest losers? No! No one really wants to. But this is why it’s so critically important to have a disciplined and repeatable process with investing and rebalancing. And this is exactly why I regularly rebalance client portfolios throughout the year.
When rebalancing occurs, this is an intentional process to take some away from the best performers, think selling at the top, and reinvest those dollars into the worst performers, think buying low. Now, keep in mind, this ONLY works if we have conviction that the worst performers will respond favorably in the coming months and years.
The concept of rebalancing certainly isn’t a new idea, but it’s an idea that requires discipline to act on and typically stands in opposition to what we emotionally want to do.
As I wrap up this section on rebalancing, I think it’s important to not just say that “it’s important to rebalance” but to also back this up with specific information that rebalancing has historically shown to reduce risk, improve risk-adjusted returns, and create higher investment returns. To read more, please review this white paper from Kitces.com
As always, if you have specific concerns or questions about your specific situation, don’t hesitate to call or email
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching.
- Stocks versus Bonds – Every few years a researcher named Jeremy Siegel updates his classic investing book titled Stocks for the Long Run and each time it’s updated I make a point to read the 400+ page textbook. This referenced article shares two very powerful charts showing the long-term relationship between Stocks and Bonds. The statistic that surprises most is the 10 year mark where historically stocks have outperformed bonds in both good and bad times.
There’s no guarantee with investing, but looking at historical information shows that the longer you invest in the broad stock market, the greater your odds in out-performing Bonds and T-Bills.
Longer holding period has historically resulted in lower volatility
- Presidential Election Concerns? – How will your investments perform with this or that President? A very normal and well-founded question. For anyone who has even had a hint of this question in their mind. Please do yourself a favor, take 5 minutes right now and read this short but effective article from JP Morgan.
- Trillions in Money Markets – At it’s highest level every reported, there’s now 6.4T in money market funds, up from 6.3T last month and up from 6.1T earlier in the year. In the investing market, this is called “Dry Powder.” These are dollars enjoying higher levels of interest than in years past. But ask yourself, what do you think will happen when/if the Federal reserve starts to cut interest rates and banks start paying less in interest on these accounts? Do you really think people will just continue to hold their funds with less interest, or do you think they’ll look for other alternatives to make money? My guess is assuming interest rates come down, these people will start to move some of these funds back into the broader market. So what do you think would likely happen to market prices if this does occur?
- Breakeven Inflation Rate - 5-Year Breakeven inflation rate is now 2.22%. When you study this chart, you’ll see it goes back to 2004. Gosh darn close to the long-term average.
- Federal Reserve Balance sheet – For months the Fed was following through on it’s statement made in May 2022 of reducing the balance sheet by 47.5 billion per month in months June-Aug 2022, then reducing the balance sheet by 95 billion per month. But, just recently, you’ll see the balance sheet spike up by 300 billion with the new bank lending program but then a quick reversal. We’re now down to March 2021 levels and declining.
Market Truths
1. The Stock Market cannot be consistently known or timed
2. The Economy (as you define it) cannot be consistently known or timed
3. Over the past 100 years, the market has returned 10.45% (with dividends reinvested). It’d be difficult for someone to achieve this return if they did not simply stay invested. Data Source
4. The average intra-year market decline is about 14% and the market drops 15% or more every 3 years. J.P. Morgan | American Funds
5. Investing in equities has historically been volatile, my guess is it always will be, however when you consider equities (using the S&P 500 as a proxy), Real Estate, short-term bonds and corporate bonds, over the long-term, equities continue to be the historical winner. To crystallize this point, just look for yourself NYU.edu.
Market Beliefs
1. Because the future cannot be known, we must embrace the belief that the world isn’t going to end during our lifetimes, and if it does, our money doesn’t matter
2. The world has continued to advance, since well before Jesus walked the earth, so assuming the world doesn’t end, it’s rational to believe the world will continue to advance
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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