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.

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.

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.

Happy New Year and Checklist for 2019

Well, we made it!  The calendar clicked over to the New Year which is the traditional time to look back on your accomplishments of the past year and reevaluate areas that need help.  Why do we need such an arbitrary date to make us take stock of things? It seems like we should be doing this all the time, but sometimes it takes a new year to wake us up and see the things that we need to work on.  Maybe all the reasons to procrastinate are over (the holidays ARE such a busy time!) and everyone is talking about goals and resolutions for the new year.

If your finances are on the list of areas that you feel needs attention, you should consult with an Investment Advisory Representative that is associated with a Registered Investment Adviser. Investment Advisers registered with the SEC or a state securities regulator are fiduciaries and are subject to the duty of loyalty and due care with their clients. They must place the client’s best interests above their own and are typically compensated by asset management fees.  While a host of professionals call themselves “financial advisors” including insurance agents/representatives and stock brokers, they do not operate under the fiduciary standards and are generally compensated on a transactional basis. It is important to find a Financial Advisor that has the knowledge and philosophy that matches you and your family’s needs. 

As we start the New Year, here are some ideas that most of us should consider.

New Year’s Checklist

•          Check your 401-k contributions. The annual amounts have increased to $19,000 and, if you are 50 or older, to $24,000. 

•          Are you earning interest on your cash?  Most banks are still paying miniscule amounts of interest on savings accounts. With the Fed having raised interest rates 9 times (cue Ferris Bueller), you have better options like money-market accounts or CDs.

•          Review your IRAs to make sure beneficiaries are listed and accurate.

•          Review your will (you have one, right?) and ensure your beneficiaries and choice of executor are up-to-date.

•          And in the words of Ferris – “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.

Hope you and your families have a healthy and prosperous 2019!

Adam

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.