Year end 2024 Update and Outlook for 2025

The stock market maintained its strong momentum in the fourth quarter, climbing 2.5%, bringing the total gain for the year to 25.0%[1] The quarter ended up positive even as stocks limped into the end of the year as investors tried to assess the financial landscape under a Trump administration.

What the Election means for the Market

The outcome of November’s election could have significant implications for the market. Trump campaigned on market-friendly policies such as reducing regulations and maintaining low corporate tax rates, which could drive growth. However, other proposed measures—such as imposing heavy tariffs on imports and large-scale deportations—pose potential risks, as they could fuel inflation and disrupt various industries. In response, the Federal Reserve may counterbalance these inflationary pressures with higher interest rates.

Uncertainty remains around which policies the new administration will implement. However, Trump’s financial appointments, which include experienced Wall Street professionals, may help temper more extreme policy moves. Additionally, given Trump’s apparent view of the stock market as a measure of his success, significant market downturns could prompt adjustments in his approach.

Fed Announcement

The Federal Reserve played a key role in shaping market expectations throughout the year, cutting interest rates three times for a total reduction of 1%, with the final cut in December bringing rates to 4.33%. However, despite continued signs of cooling inflation, the Fed signaled a more cautious outlook, suggesting fewer rate cuts ahead. This shift prompted markets to adjust expectations for 2025, with anticipated rate cuts falling from four to just one, resulting in higher long-term rates and some downward pressure on asset prices.

Portfolio Positioning

In light of these developments, we have made strategic adjustments to our portfolios which could better align with evolving market conditions. On the equity side, we have reduced exposure to China and high-growth stocks, which can be more vulnerable to rising interest rates. Instead, we have increased allocations to industrials and financials, sectors that could stand to benefit from domestic economic policies and deregulation. In fixed income, we have shortened bond durations to better manage interest rate risks in a potentially volatile environment.

We remain committed to maintaining a well-diversified portfolio and will continue to monitor market conditions closely, adjusting our strategy as necessary to navigate the shifting landscape.

LA Fires

Another devastating natural disaster has impacted the U.S., and many people are in urgent need of assistance. For those looking to help, here is a list of reputable charities and organizations actively providing aid on the ground. Using a Donor Advised Fund (DAF) is an effective way to contribute while also maximizing tax benefits. DAFs are simple to set up and use—if you’re interested in opening one, I’d be happy to offer guidance.

American Red Cross is engaging in wildfire relief efforts to shelter families, serve meals, support emergency responders, provide medical care and deliver emergency relief supplies.

Baby2Baby is providing diapers, food, formula and critical hygiene items to children and families impacted by the fires.

Los Angeles Fire Department Foundation is providing critical equipment, technology and emergency resources to support LAFD crews battling the fires.

Los Angeles Regional Food Bank is providing emergency food assistance to families and residents impacted by the fires blazing across LA County. 

On a more uplifting note, there was a picture that went viral of Philadelphia Eagles star receiver A.J. Brown reading a book on the sidelines during their last playoff game. The book he was reading was “Inner Excellence,” by Jim Murphy.  In it he describes the four daily goals.

1.    Give the best of what you have that day.

2.    Be present. Being in the place where there’s no concern for self, no concern for the outcome

3.    Be grateful. Look for he smallest moments, three a day, that were gifts for you. The smaller the better.

4.    Focus on your routines and only what you can control.[2]

While it is a book that focuses on Sports Psychology but can be useful for us all.

[1] https://www.nasdaq.com/articles/third-quarter-2024-review-and-outlook

[2] https://www.nytimes.com/2025/01/13/sports/football/aj-brown-reading-inner-excellence-book-murphy.html

Second Quarter 2024 Update and Outlook

As we reach the midpoint of the year, I want to take this opportunity to share insights into the current market dynamics, key economic indicators, and strategic considerations for your investment portfolios.

Strong Start to the Stock Market

The stock market has shown remarkable strength this year, with large-cap growth stocks leading the charge.  Companies within the technology sector, particularly giants like Nvidia, Apple, Microsoft, and Amazon have dominated the gains this year while the average S&P 500 company has had middling returns.  It is hard to forecast these times of concentrated outperformance so having exposure to the whole large cap market, obviously, means exposure to these companies. On the flip side, the market leaders can quickly change, as leaders can be limited by the sheer size of the gains, so portfolios will also benefit if other stocks take the reins. In fact, we are starting to see some signs in the last couple of weeks of the market broadening out, with smaller stocks outperforming these mega cap names.

Current Economic Indicators

Recent economic data indicate the economy continues to expand - with the GDP growing at a 1.4% rate. This rate is down from 3.4% in the fourth quarter 2023[i] and leading economic indicators suggest that growth may continue at this more moderate level as the Atlanta FedNow is projecting GDP for the second quarter to stay around 1.4%[ii].  Other areas of the economy are strong but showing signs of weakness. For example, the recent unemployment rate of 3.6% shows the labor market has been at historically low levels of unemployment but the June reading spiked to 4.1%[iii]   Fortunately, the inflation statistics are still trending lower with the recent statistics moving down to the low 3% range.  Some of the stickier data points are housing related which should mean continued decreases in the coming months. [iv]  While the Federal Reserve has not implemented any rate cuts this year, there is speculation that they may consider them later in the year if economic conditions continue to weaken and inflation continues to ebb.

Positioning in Front of the Election 

With the election approaching it is interesting to note how the market typically reacts in election years.  The historical data is encouraging.  As the chart below shows, during the second half of an election year returns outpace the average year by 4.2%.  Obviously, this far from guarantees strong results for the remainder of the year, but this points to evidence that elections may not be a time to be overly cautious.

 
The first half of presidential election years tend to be sluggish, followed by a big second half

Average return, 1/1/26 – 12/31/23

Source: Morningstar as of 12/31/23. Stock market represented by the S&P 500 Index from 1/1/70 to 12/31/23 and IA SBBI U.S. large cap stocks index from 1/1/26 to 1/1/70. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in the index.

Positioning and outlook

Given the current market conditions and economic indicators, we recommend maintaining a balanced and diversified portfolio. While the performance of large-cap growth stocks has been impressive, diversification across different sectors, geographies, and asset classes can help manage risks and enhance long-term returns.  Allocations to longer duration bonds should also do well if the economy weakens.  This could provide a hedge for equities that may struggle in a difficult economy.

[i] https://www.bea.gov/data/gdp/gross-domestic-product#:~:text=Real%20gross%20domestic%20product%20(GDP,real%20GDP%20increased%203.4%20percent.

[ii] https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

[iii] https://www.bls.gov/news.release/pdf/empsit.pdf

[iv] https://www.bls.gov/cpi/latest-numbers.htm

Third Quarter 2023 Update and Outlook

The stock market declined in the third quarter after a strong start to the year.  The S&P 500 dropped 3.3% but, as of the end September, the S&P 500 Index had notched a 13.0% gain for the year. The big worry at the beginning of the year was an impending recession.  Fast forward nine months, and the economy has displayed remarkable resilience, leading some analysts to believe that we may evade a recession and experience a "soft landing."  

One of the main reasons for the recent weakness in stocks has been the increase in long-term interest rates.  While the Fed controls the short end of the curve and has raised rates from zero to 5.50%, buyers and sellers in the market determine the long-term rates.  Since July, the longer dated yields have moved from 3.75% to over 5%. 

Long-term bond rates are instrumental in valuing assets. Two or three years ago, income producing assets were highly sought after, as interest rates were incredibly low.  Today, however, these assets are devalued as they compete with these more attractive bond yields. 

While long-term rates have pushed down stock prices, this weakness may be an opportunity.  If inflation continues to drop, the economy dips into recession, or geopolitical risks increase, long term rates could drop. This reversal could support asset prices in the months to come.  

The Fed has been waging war against inflation since March of 2022 and seems to have the upper hand. The Consumer Price Index has dropped from 9.1% in July of 2022 to 3.7% in September[1]. Drilling down on some of the inflation numbers makes the numbers look even better, as the lagged effect of a dropping housing market has not yet fed into these inflation numbers.

The economy, while resilient, has shown signs of weakening. Home builders’ sentiment has been dropping since the middle of the year and is the lowest level since January. [2] Also, the Leading Economic Index (“LEI”) has been trending lower and points to lower economic activity. In the chart below, there is a strong correlation between a low LEI and economic recession, which are shown in the gray areas.

As for global risks, it is hard to separate the investing from the terrible and horrific events in Israel and mourn the loss of innocent civilians, but it does reinforce a focus on investing in the US and other stable regions.

The opportunity we see in these higher rates has shifted our portfolio allocations. We had been focused on shorter duration bonds for income, thinking this was the better risk/reward option.  Now with higher rates out the yield curve, we have been allocating more into longer duration bonds.

[1] https://ycharts.com/indicators/us_consumer_price_index_yoy

[2] https://www.nahb.org/news-and-economics/press-releases/2023/10/mortgage-rates-well-above-7-percent-continue-to-hammer-builder-confidence

Disclosures: Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The future performance of an investment or strategy cannot be deduced from past performance.

Donor Advised Funds

While the Tax Cut and Jobs Act of 2017 should have had the effect of lowering taxes for most taxpayers, the higher standard deductions and lower limits on property tax deductions are a one-two punch for deductibility of charitable giving.  For most taxpayers (especially married ones), the Standard Deduction will be, well, the standard.  It is hard to reach the $25,000 threshold for deductibility by adding your mortgage interest with the new $10,000 maximum for property and state taxes.  For those who support non-profits and unable to breach the $25,000 level, more planning is needed to make those gifts more impactful in lowering your taxes.  

One strategy you may want to consider is lumping your charitable giving. One effective way to do this is through a “Donor Advised Fund.” Donor Advised Funds (DAFs) are 501(1)c organizations under which you can maintain an account. Think of it as a simplified charitable foundation but easier to set-up and less expensive to maintain. After funded, the donor can “suggest” donations that the DAF can follow. The best part is that funding your DAF can be done with appreciated assets, forgoing capital gains taxes, and will continue to be invested for future tax-fee gains.

Benefits

·         The assets that are contributed to the DAF are deductible at current values in the current year.

·         No capital gain liability on appreciation.

·         The funds are invested, tax-free.  DAF platforms all have a few options for how the funds are invested.

·         Grants can be parceled out to charities in increments as low as $50, based on your request at any point.

·          Many brokerage firms have DAF platforms that are easy to use.  

Drawbacks

·         There are some AUM fees charged by the DAF sponsor.

·         While the gifting procedure is very easy, bookmarking the donation based on specific events can be a little trickier.

If you are already gifting to charities on a regular basis, it makes a lot of sense to maximize that gifting with the use of a DAF, especially in light of the high Standard Deductions and Property and State Tax limitations.

We would be happy to assist in determining if a DAF would help you in your situation.

GameStop Fiasco and the Implications for the Market

It is rare for a fringe computer-game retailer to make national headlines, but the GameStop saga has done just that.  Through a confluence of events, the stock of a shrinking, bricks-and-mortar retailer, shot up 20-fold in a matter of days sending shockwaves through other areas of the market.

It has been set up as a battle between short-selling hedge funds versus an army of retail investors. Short sellers borrow shares and sell them with the promise they will buy them back at a future date. They profit when the stock drops.  GameStop was a perfect company for them to short with their dwindling store base and buyers’ move to downloading games directly from the makers.  In fact, they shorted so much that there were no additional shares left to possibly borrow.  Cue the vocal Reddit traders.  One especially aggressive and passionate investor, with seemingly thousands of followers, started touting the stock. This, along with a possible turnaround in the GameStop strategy with the hiring of a Chewy.com executive, provided the spark for some upward movement in the stock.  The upward momentum of the stock with the aggressive use of inexpensive stock options to leverage their bets, made these “amateur” traders more and more money while the hedge funds were hemorrhaging.  The hedge funds faced margin calls and a loss of assets which forced them to buy back the stock at higher and higher levels.  All of this fueled one of the more insane moves that I can recall.  There is literally no reason for the stock to be trading over $300 per share and will eventually fall back to earth with all the financial pain for those still owning the stock when the music stops.

There are several ramifications for this situation.  First, the hedge funds and other investors who have lost a material amount have, and will, be forced to pare back their other positions.  We have seen some weakness in the market especially in stocks that are held by hedge funds. Second, it will create other crazy moves as the mob of Reddit investors fresh off their win move on to new battles to wage. Third and most critical, it clouds the question whether this a well-functioning market.  The Fed stimulus and extremely low interest rates can impact asset prices.  In my view, a lot of the reason why the market has done so well is because of this.  The goal is for there to be a healthy amount of enthusiasm for speculation, and although we cannot predict the future based on past performance history, asset bubbles, like what we saw in the late-90’s tech boom, can potentially foretell market tops and could warrant caution.  A handful of short squeezes in small companies is not on the order of what we experienced in 1999, but we are on alert for other dislocations of price versus reality.  For now, we see corporate profits routinely exceeding expectations, an accommodative Federal Reserve, additional stimulus and the roll-out of the vaccine-- all of which should be beneficial to the market.  The sooner these Reddit “investors” move back to playing video games, rather than the market, the better.

APG Capital Asset Management 2nd Quarter 2020 Review and Outlook

The United States is still grappling with escalating Covid-19 cases, historically high unemployment, and a severe recession, all while the stock market had the best quarter in twenty-two years. With such a bleak background, this strength seems fairly bizarre but there are reasons for the S&P 500’s 20% quarterly rally to end the year down only 3%[1].  

Stock prices are determined by the present value of estimated future earnings.  Stock market valuations may imply that investors are looking past the next few quarters and that corporate profits rebound fairly rapidly in 2021 and 2022.  But with the uncertainty that exists, most of those estimates are impossible to determine so optimism over future profits only tells part of the story.

The most reasonable explanation is due to the unprecedented amount of government stimulus being pumped into the economy.  The payments to taxpayers and businesses, combined with the Federal Reserve bond buying programs (see the chart below of Fed activity), have created a flood of new money into the economy.  The effect of this is to devalue dollars, which increases inflation.  This, in turn, pushes assets like stocks, real estate and commodity prices up.  This gels with what we’ve experienced.  But stock prices should also weigh the risks of a depressed economy on the profitability of corporations and demand for hard assets.  We may be in a stage of the market recovery where the market will bounce around, finding where these opposing forces find an equilibrium.

It is useful to note how the market reacted to past pandemics.  During the Spanish Flu of 1917-1918 as shown below, the market then similarly plunged about 33%.  After the market bottomed, it quickly rebounded, traded in a range for a year, and then trended higher.  It took about 15 months for the market to fully recover the pre-virus highs.

This pandemic is forcing companies to adapt to news ways of doing business.  While many companies are struggling, there are some that are capitalizing on their market position.  Active management could have a good chance to outperform in this environment. We remain focused on growth stocks relative to value and de-risking portfolios through an overall lower weighting to stocks may be prudent.  We believe It is important to stay focused on the long term. While there may be short-term market weakness as we learn more about the wave of outbreaks and how companies are faring in the next earnings announcement cycle, it is hard to bet against the long-term ability of companies to evolve and thrive in new environments. This is especially true as long as the Fed remains highly supportive.

While the market continues to confound, we recommend paying attention to areas we can control.  Here are some things to consider:

1.       Make sure you are taking advantage of tax savings. 

• maximizing deductible 401-K and IRA contributions, (the deadline for 2019 contributions were pushed to July 15th this year

• tax-loss harvesting, and

• smart charitable giving, either to a Donor Advised fund or a Qualified Distribution from IRAs.  

2.       With the prospect of higher future tax rates, there may be opportunities converting Traditional IRA holdings to a Roth IRA.  

3.       Reviewing your mortgages to see if a refinancing makes sense

4.       Take a closer look at your expenses so there are no holes in your budgeting and cash planning.  

5.       Please stay safe - avoid crowds, wash your hands and, for the safety you and your loved ones, wear a mask.

This marks the third anniversary of APG Capital and I want to thank all of my clients for your trust and time.  I truly appreciate our collaboration and sharing of ideas.  I look forward to seeing you all in person soon.

Advisory services offered through APG Capital Asset Management, a Member of Advisory Services Network, LLC.

713-446-3233

www.apgcap.com

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  The future performance of an investment or strategy cannot be deduced from past performance.  As with any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors.  All economic and performance data is historical and not indicative of future results.  All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.

[1] https://www.statista.com/chart/22169/change-in-us-stock-market-indices-in-the-second-quarter-of-2020/

[2] https://www.marketwatch.com/story/market-behavior-a-century-ago-suggests-the-worst-could-be-over-for-stocks-if-not-for-the-coronavirus-pandemic-2020-03-19

Coronavirus Update and Positioning - March 18 Letter to Clients

I wanted to give you some of my thoughts on the Coronavirus and the impact on the markets.  I think that the government is finally on board with broad efforts to stop the spread of the virus and to provide aid to people and companies most affected by the virus.  I am in favor of the current guidelines around social distancing and take a preponderance of care in your daily activities.  These efforts to slow the virus should help keep more Americans from getting sick and those that do, the proper medical assistance.  This will no doubt disrupt our lives and affect companies possibly for a longer period of time.  As evidenced by the slowing rates in China and South Korea, taking drastic efforts now should pay off down the road. 

I construct portfolios to match your tolerance for risk and to help generate the most return.  However, this is not a “set it and forget it” process.  As the risks have increased, I think additional caution is warranted. 

Typically, we judge the value of stocks based on the future cash flows the companies generate.  There are a number of inputs, but to simplify, we look at the current earnings, the expected growth, and an interest rate to “discount” those future cash flows.  Prior to the outbreak, there was relatively high certainty to those inputs; however, In the current environment, the market is struggling to know what any of those numbers are.  In addition, the ability of some companies to repay debt is also in question.  We cannot rely on past earnings or many companies to estimate their current or future earning power.  Furthermore, the risks in the market are raising the discounting interest rate which lowers the value of those future cash flows. 

Much of this uncertainty has been absorbed by the market, as the stock market has dropped so precipitously in such a short time frame.  However, I believe the virus will run its course at that economic activity will rebound and companies should go back to normal operations and return to generating profits.  I think this is a short-term phenomenon for most companies and stronger companies with good balance sheets may even come out more efficient and in a better position to grow.  As the market is forward-looking, the market should bottom well before the economy and timing that bottom will be impossible. 

This market fluctuations can be unnerving.  Please know that I am keeping a close watch of the markets on your behalf. The most important thing is your health, and the well-being of your family, friends, and neighbors.  I am available to provide guidance on some financial items like refinancing your mortgage, looking at your budgets and financial plans, and update changes to your estate planning.  Otherwise, take the opportunity to do some spring cleaning, work on projects around the house, catch up on some reading and TV shows and take some mental breaks from the news! 

2019 Financial Planning Year-End Checklist

The holiday season is a time for family and reflection.  Hopefully, it will also leave some time to take stock of your finances. As the calendar resets in a month or so, it is wise to remember some important financial end of year to-dos to make sure you have maximized your situation by lowering taxes, bringing portfolios back into balance and your estate planning is up to date.  Happy Holidays and may you have a wonderful 2020!

         Consider funding a Donor Advised Fund with appreciated assets.  One larger contribution that can fund your charitable giving for many years can help push your deductions high enough to itemize, and it avoids capital gains taxes on the appreciation.

•          Harvest capital losses.  After a year like 2019 when practically all asset classes rose, it may be hard to find losses, but there are always those that struggled.

•          For those 70 ½ or older or have an inherited IRA, make sure you take your RMD to avoid paying a 50% penalty.

•          Also, for those 70 ½ or older that have Required Minimum distributions from their IRA, a preferred way to donate to money to a charity is thru a Qualified Charitable Distribution. These payments count toward satisfying your RMD for the year (up to $100,000) and are excluded from income for tax purposes.

•          If there are any changes to your estate plan or beneficiaries, make sure you will (you have one, right?) has your final wishes.

•          You have until April 2020 to make your IRA contributions, but if you already know what kind of contribution you will be making (Roth, tax-deductible traditional), now is a great time to make it. Remember, the contribution limits are up to $6,000 for those under 50, and $7,000 for those 50 and older.

•          Decide when you are making that property tax payment.  With the new lower deduction for state and local taxes of $10,000, it may not be as critical, but some still benefit from choosing which year to make the payment.

•          If you happen to have a lower-income year, take advantage by thinking about a Roth conversion. Filling up your low marginal income-tax-rate buckets with income from moving dollars from traditional to Roth IRA may pay long term benefits.

•          Reallocate your investments.  After such a strong year in the equity markets, you may be tilting a bit stock-heavy in your portfolio.  Consider taking some chips off the table and trim strong performing growth stocks in favor of value and international equities and high-quality bonds.

•          Remember the words of Bob Harris from the film Lost in Translation (2003) “The more you know who you are and what you want, the less you let things upset you.”

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.

How you Use Your Accounts can Significantly Affect How Much of Your Assets are Actually Yours

To calculate your net worth is it accurate to add up your assets and subtract your debts. Not quite. Some of your assets are actually the government’s!

Your 401-K and IRA contributions were deducted from your income, so the government still needs to collect taxes on this money.  The funds you, or your beneficiaries, withdraw is counted as income for tax purposes.  Even your brokerage account, in which your deposited post-tax dollars, still have embedded capital gains which will be paid when sold.  The government’s stake in your accounts are a function of your future earnings and the marginal tax at the time you either sell stock (in your brokerage accounts), or withdraw the funds (from tax-deferred accounts such as Traditional IRAs and 401-Ks).  Only tax-free accounts like 529s, Health Savings Accounts and Roth IRAs are 100% owned by you.   

Here are a few tips to minimizing the tax hit. 

1.       Fill your tax buckets

In retirement, choosing how you time withdrawals from your accounts can save thousands of dollars in taxes.  The two commonly used methods, “one-at-a-time” and “proportionally”, have some benefits but may not be optimal. The one-at-a-time approach pushes the tax deferral benefit of your accounts out in time.  This would entail taking from brokerage accounts first, then tax-deferred and finally tax-fee accounts (like Roth IRAs).  However, this may not mean a lower total tax bill if you have large capital gains in your brokerage account or you are paying high tax rates during the years when you withdraw from tax-deferred accounts.  A more tax efficient strategy could be the Proportional method.  This way, you are pulling from all the accounts according to the size of the balance.  This evens out the tax bill, and could mean paying lower marginal rates; however, this method still may not minimize taxes.   Taking a more customized approach of consciously filling your taxable income buckets, and then ordering your brokerage and Roth accounts may lead to lower overall taxes. 

2.       Consider the timing of income

If you are between jobs for an extended time or in retirement, take advantage of low earning years by filling your marginal tax buckets.  Consider this as arbitraging future tax rates with current tax rates.  It may be smart if you can pull forward income and pay a low marginal tax today, versus an unknown future tax rate.  This may be in the form of withdrawing dollars from your tax-deferred accounts to pay for your expenses or to converting to a Roth IRA. (Roth conversions can be done at any age.)  To fill up the 12% marginal tax bucket, a married person with a mortgage and two kids can earn about $100,000.  If your income is less than that, check with your tax preparer and financial advisor about ways to pull income into that year.

3.       Capture losses

Just as the government owes some of your capital gains, they also share in your losses.  Take losses especially if you are offsetting gains.  If those are short term gains which are usually taxed at a higher rate, all the better.  Be sure not to trigger a “wash sale[1]”-- so either wait 31 days to re-purchase the security, or switch to a security that is not “substantially identical”.

Careful and thoughtful financial planning may influence the timing of some financial moves to significantly alter how much of your assets are truly yours and how much are the government’s. 

 [1] https://www.sec.gov/answers/wash.htm

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation. 

The Growth Rally Continues: 2nd Half 2019 Outlook

The 2019 stock market rally continued in the second quarter, with the S&P 500 tacking on another 4.3%, giving the S&P a 18.5% return for the year.  With earnings tracking to a modest 2.6%[i] growth rate for 2019, this gain is mostly due to the Price/Earnings multiple expansion.  The market is clearly more expensive today than it was at the beginning of the year.  At the current forward P/E of 16.9, the market is trading slightly ahead of the 10- year average of 14.8.  A major reason for this is the Federal Reserve changing course and pumping liquidity into the market by signaling their openness to lower interest rates.  As the 10-year bond yield has dropped from 2.6% to below 1.9%, the options for investment returns have shrink in the bond market, pushing investors into other areas, including the stock market.

Growth has outperformed Value

All stock sectors though are not benefiting equally.  We have seen tremendous divergence between value and growth stocks with growth trouncing value.  Over the last 5 years, the Russell 1000® Growth Index beat the Russell 1000® Value Index by almost 6% per year (13.4% vs 7.5%). Much of the market history have favored the exact opposite.  For the prior 19.5 years, value outperformed by over 1.5%/year (10.5% vs 8.9%). [ii]

What has caused this notable performance change in Value versus Growth?  In a recent report from Ned Davis Research[iii], they point out how a number of reasons for this. First, the mere fact that value had historically outperformed had market participants overweight in this direction. This may had led to over-valuations in value stocks, in effect, removing the advantage. The second is somewhat counterintuitive.  They have found that value stock outperformance requires a stronger growth economy.  Growth stocks can grow regardless of the underlying economy, while many value stocks need a booming backdrop to succeed. This makes sense for banks, which require a decent spread between short-term rates and long-term rates, typically happening during booms. Another value sector, commodity-based companies earn excess profits when material shortages occur, also typically in a bustling economy. Since the end of the financial crisis, the economy has been slowly and steadily improving, not quite reaching the “escape velocity” that value stocks need.  

When will Value be Back in Favor?

The fact that the market has rewarded growth for an extended time may not indicate it is changing any time soon. This is, in part, due to changes in our economic cycles. As the economy has shifted from manufacturing to consumption, the economic cycles have lengthened due to the more stable consumer spending pattern versus shorter manufacturing cycles.  Even with the long period of growth, the Federal Reserve is still pumping the economy with low rates and expectations are for even lower rates in for the next few years.  In their report, Ned Davis points out 12 Indicators which help them to determine which indicators are pointing to Growth or to Value and only 2 are leaning toward Value versus 6 for Growth (4 are neutral).  Furthermore, they argue that the biggest driver of a switch is the economy reaching escape velocity. Therefore, with the Fed still needing to help the economy, they see this trend continuing. 

Here at APG Capital, I see reasons to be cautious, namely valuations are elevated and significant political risks. We are favoring a modest underweight to equities, but within our equity allocation we are sticking to a growth theme as these companies continue to disrupt industries. 

APG Capital Asset Management recently hit its 2-year anniversary and we are so thankful for the continued trust and confidence of our clients.

[i]https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_070319.pdf

[ii]  https://indexcalculator.ftserussell.com/ICStep4DR.aspx

[iii] Clissold, Ed, “US Featured Report: Will Value ever outperform again”, Ned Davis Research, May 30, 2019.

Advisory services offered through APG Capital Asset Management, a Member of Advisory Services Network, LLC.

Phone: 713-446-3233  Website: www.apgcap.com

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  The future performance of an investment or strategy cannot be deduced from past performance.  As with any investment or investment strategy, the outcome depends upon many factors including investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors.  All economic and performance data is historical and not indicative of future results.  All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.