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

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.

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.

Market has Rallied Back to the Highs. Is it Cause for Euphoria or Fear?

The last six-months have been a wild ride for the market. The big sell-off in the fourth quarter of 2018 is fading from memory and the S&P 500 has pushed back to all-time highs.  For the factors cited for causing the market drop, not much has changed.  Trade talks with China continue, Brexit is still in limbo and growth expectations, as predicted, have moderated.  Yet, here we are, back at “record highs”

I find it humorous when the news hypes the fact that the market is making “record highs.”  Like this is a rare occurrence and a new feat of capitalism.  In fact, taking a long view, the market is usually at “record highs”, as the stock market tends to move in an upward trajectory.  It’s like saying your age is at record highs.  Well, almost.   The market does drop and it can take years to get back to previous levels, but thus far, the long-term trend is for the market to ratchet to higher and higher levels. There are many reasons for this, like: inflation, population growth, and fairly efficient allocation of capital. 

Traders and hedge funds have short time frames in which to show results.  Catching moves (in either directions) is their goal, leading to more aggressive re-positioning of portfolios.  Most individual investors have the huge advantage of a long time frame.  When you have years or decades to mark your success, sharp pullbacks and rallies can be obscured by the long-term trends.

The fact that the market is making new highs should be cause for neither euphoria or fear.  We should put our psychological biases aside and remain committed to our investing plan.  Harder said than done.  Debates over timing the market is great for dinner parties and validating our worth as investors (or financial advisors), but how does it actually translate in our brokerage statements?  It is a worthwhile question to pursue.  One thing is true, considering the 17.6% surge in the S&P 500[1], the risk-reward of investing now is less compelling than at the start of the year. 

Market momentum works both ways.  The market unraveling in December seemed to feed on itself creating an overshoot that was, in hindsight, a great buying opportunity.  Similarly, the rebound action may continue to grind the market higher.  Rebalancing your portfolio is generally a prudent tactic. Buying when the market drops and lightening as it rises to keep your portfolio anchored to an allocation sometimes helps to take advantage of volatile markets--helping both the portfolio and ego.

[1] http://performance.morningstar.com/funds/etf/total-returns.action?t=IVV&region=USA&culture=en_US

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.