April 5th 2024
“While we believe that there will be a bit of a pullback at the beginning of the year to consolidate the gains of Q4, we also believe the markets are well positioned to continue their resumption on the upside. Having said that, we remain constructively bullish on the economy and the markets in both the near and intermediate term.”
FMG Q4 Newsletter
The “Magnificent Seven” Continues to be…Magnificent!
Q1 is in the books and the beat goes on. The beat of an increasing market that is:
DJIA +5.62%
S&P 500 +10%
NASDAQ +9.11%
We mentioned in last quarter’s Newsletter that we anticipated a pullback at the start of the year that would consolidate the 2023 year-end rally. This is typical, as strong market movements – up or down – are often followed by a reversal in direction. The good news is that the pullback did not last long at all. After a brief pause, the markets continued their upward trend from mid-January through the end of February. You cannot talk about the market’s performance without discussing Artificial Intelligence (AI). You cannot discuss AI without mentioning “The Magnificent Seven” and, you cannot discuss the Magnificent Seven without highlighting the major mover of the group, NVDIA. In 2023, the Magnificent Seven – NVDIA, APPL, Microsoft, Google, Amazon, META, and TESLA – accounted for some 70% of the market’s performance. Many market historians compare AI to the founding of the Internet back in the late 90’s, early 2000’s. As clients of ours, you have benefited from this movement and your portfolios are positioned to continue to do so. While we believe this outperformance will continue into the foreseeable future, we do expect other sectors of the market to join the party.
The markets hit turbulence again in the second week of February when the Consumer Price Index (CPI) - considered a barometer of inflation - came in higher than anticipated. Two more data points followed indicating that the Federal Reserve had more work to do on the inflationary front. These reports were not necessarily indicative of the resumption of interest rate hikes, but rather that the Federal Reserve certainly would not consider cutting rates after three months of pausing the increases as had been projected by market prognosticators. We have strongly voiced our disagreement with the “talking heads” on Wall Street clamoring for a rate cut. Not only were they calling for a rate cut, but also predicted that many cuts would occur this year. Nothing more than self-serving optimism, as a cut in rates would push markets higher. Wishful thinking! A cut in rates at this moment simply defies logic. The Federal Reserve’s job is to manage the economy, not the stock market! The Fed will tend to cut rates in a weak economy and/or high unemployment to spur economic growth. Yes, rates are still high, but with unemployment at a forty-year low and the economy growing, calls for an interest rate cut are premature. The three data points that came out suggested that a cut in rates was not necessary at this time. With that said, the markets pulled back. Fortunately, the pullback was short-lived as the market’s momentum showed strength even without a rate cut. The markets resumed their upward trend resulting in February turning in the best performance of the S&P 500 and NASDAQ in 10 years. Then came March.
The markets stumbled out the gate in the first week of March. As mentioned, strong market movements up or down are often followed by a reverse of course. Such was the case in the first couple of weeks of March. The market performance record that was set in February was followed by a consolidating pullback in the beginning of March. This good old-fashioned pullback was further exasperated as a result of market prognosticators continuing to voice complaints about the Federal Reserve’s inaction on the rate front. As mentioned, these “talking heads” had been projecting rate cuts from the Federal Reserve. Given the continued economic data indicating that the Federal Reserve had no reason to cut rates in the immediate, and chose not to cut rates, the markets pulled back once again. To add to the market weakness, four of the market “darlings” - TESLA, Apple, Google, and META – hit turbulence, with each reporting company-specific challenges that took their share prices down. While none of the problems appear to be long term damaging, these events reminded investors that stocks do not go straight up. There will be some bumps along the way and that periodic profit taking is prudent. The profit taking spread to other AI related companies, specifically NVIDIA, and thus, the overall market. Just a good old market pullback. Being the contrarians that we are, we took advantage of the opportunities that were created, and bought the dip. That move paid off when in the third week of March, Fed Chairman Powell intimated that that there will be two to three rate cuts later this year. The markets celebrated that announcement by turning in the best weekly performance of the year, and with the S&P 500 turning in the best Q1 performance in 5 years. The beat goes on!
Note: We would be remiss were we not to acknowledge the performance of Cryptocurrency. While we continue to be lukewarm at best on the sector, we will acknowledge that the asset class has rallied from its low and hit new highs…without our participation.
The Market Rally Broadens
In mid-March, the Wall Street Journal ran a headline we had long waited for: “It Isn’t Just Big Tech Propelling Gains in the Stock Market Anymore.” We suggested last quarter that the environment is ripe for other companies and industries to play catch up and generate favorable returns for investors like Big Tech. We stated that we expected a more normal market performance as the expansion of breadth and depth of the market rally took hold. Though we were a bit early on that call, we are starting to see this come to fruition. There are high quality companies and industries that deserve attention from investors. Investors are asking, who/what’s next? As profit taking occurs in the Tech Sector, investors are finally starting to look at other companies and industries to play catch up. As well, given the movement in Big Tech, portfolio diversification becomes important to avoid concentration. Having said that, we are finally starting to see Sector Rotation and momentum expansion in other areas. Other areas of the market are starting to join the party not at the expense of the Tech Sector, but in addition to. Your portfolios are strategically positioned to benefit from both.
The Way Forward
While we remain constructively bullish, let us be clear, challenges remain. We are still faced with geopolitical unrest, domestic discord, a contentious presidential campaign, and a border crisis just to speak to the obvious. Moreover, after five straight months of gains in the markets without any meaningful pullback, we believe that the markets are overdue for a technical correction as stocks appear to be overvalued in the near time. Barring anything unforeseen, we do not believe a technical correction would be severe nor long. Having said that, there remains empirical evidence to support bullish sentiment including continued economic growth, low unemployment, moderating inflation, and robust corporate earnings. Given these two competing scenarios, we expect continued volatility resulting in a choppy upward trend. We will continue to buy the dips when warranted, take profit when prudent, and always look for innovative ideas and emerging trends to take advantage of. Stay tuned.
As stewards of your capital, it is FMG’s objective to preserve your wealth while delivering returns that, over the long term, will enable you to attain your financial goals. That has not and will not change.
As always, feel free to contact us to discuss your specific portfolio(s) and financial situations. We appreciate your vote of confidence, we thank you for allowing us to serve you, and wish you many happy returns!
Ivan Thornton
Managing Partner, RIA
______________________________________________________________________________________________________
January 5th 2024
“Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time…..The world is full of foolish gamblers, and they will not do as well as the patient investor.” Charlie Munger, Vice Chair, Berkshire Hathaway
Charlie Munger was Warren Buffet’s best friend and Vice Chair of Berkshire Hathaway. He passed on November 28th at age 99, taking with him a plethora of age old and time proven market wisdom. He will forever be recognized as one of the most successful investors of all time. We work hard here at FMG to emulate his success. RIP.
A Market Melt Up
2023 is a wrap and the results are in:
DJIA + 13.7%, S&P 500 + 24.4%, and the NASDAQ +43.4 %
2023 provided us with one of the most volatile market performances in history with the uncertainty around interest rates dominating the economy and market movement throughout the entire year. In the end, we enjoyed what proved to be a banner year, with each index moving to historical highs. What a difference a year makes! We rode the wave of solid growth in the first six months of the year with the market returning big gains led by the large cap Tech companies. This was good news for our clients as this sector has long been a core holding in our portfolios and continues to be. Tech companies were rebounding from the doldrums of 2022 and traded even higher on the heels of the Artificial Intelligence (AI) come up. High profile companies in the likes of Apple, META (Facebook), Alphabet (Google), NVDIA, etc., dominated the financial headlines throughout the year. This group (part of the Magnificent Seven) drove performance, representing upwards of 90% of the total market performance in the year. The momentum of the market rally slowed in Q3 with the markets pulling back in response to the Bank industry meltdown as well as major Wall Street firms downgrading many of the top performing Tech stocks on a price basis. We understood the downgrades as these companies had been on a tear as it relates to price appreciation. Many of the top mega Tech stocks had appreciated precipitously with some even doubling in value. Valuations had become stretched. With a commitment to prudence, we too took some profit in clients’ portfolios to make certain that we would not be overly concentrated in a particular company or industry.
The downgrades and profit taking launched the beginning of a painful market selloff to start the 4th quarter. The markets were also selling off in response to a plethora of challenges including the geopolitical turmoil in Ukraine, and now a new war in the Middle East. Add to that, challenges at home in the likes of a divided Congress without a leader, constant threat of a government shutdown, the ongoing immigration problem, and the continued focus on interest rates.
As history has repeatedly shown us, market movements – up or down – often move to excess. Now was no different. We stated at the time that we believed the markets had moved excessively to the downside and that they were oversold. We suggested that a market rally was forthcoming and that it would expand beyond the Tech stocks and spread to other companies and industries that have yet to participate in the Market Melt Up. We reallocated funds from the profits we took to companies and industries that we believe would play “catch up” in 2024 and beyond (Sector Rotation). Though the new positions may not have been sexy or exciting, we believed that our actions were prudent and that the new positions we put on were undervalued and would be profitable for portfolios in time. This strategy proved fruitful by year’s end.
A collective sigh of relief came in the second week of November when the Consumer Price Index (CPI) reflected a substantive cooling in inflation, providing evidence that the Federal Reserve’s strategy of taming inflation was working. The Federal Reserve responded by pausing the rate hikes. Markets took off and never looked back. By all measures, November was categorized as a blowout month as it relates to market performance. In mid-December, the Federal Reserve announced yet another pause in rate increases and even suggested rate cuts appear likely in 2024. Clearly this was welcoming news for investors as the markets rallied in the last nine weeks of the year, sending all three indexes to historical highs.
The Way Forward
The “Perfect Storm” … for Continued Upward Movement
There is empirical evidence to support this notion including, but not limited to:
· Inflation ebbing
· Interest rates coming down
· Record low unemployment
· Continued economic growth
· Robust corporate earnings
These are all positive catalysts that should send markets higher. While we believe that there will be a bit of a pullback at the beginning of the year to consolidate the gains of Q4, we believe the markets are well positioned to continue their resumption on the upside. We are not alone in this sentiment. Analysts across Wall Street have lined up to tout their bullish projections for 2024 that the markets will continue to move higher. While agreeing, let us be clear, challenges remain. With all the positives notwithstanding, we are still faced with geopolitical unrest, domestic discord – with an election coming in the Fall – and a border crisis, just to speak to the obvious and known. Given that, we remain constructively bullish on the economy and the markets in both the near and intermediate term. Constructive you ask? While we believe the environment is ripe for other companies and industries to play catch up and generate favorable returns for investors, we expect a more normal performance as the expansion of breadth and depth of the markets takes hold. We have positioned your portfolio(s) to participate.
As stewards of your capital, it is FMG’s objective to preserve your wealth while delivering returns that, over the long term, will enable you to attain your financial goals. That has not and will not change.
As always, feel free to contact us to discuss your specific portfolio(s) and financial situations. We appreciate your vote of confidence, we thank you for allowing us to serve you, and wish you many happy returns!
Ivan Thornton
Managing Partner, RIA
__________________________________________________________________________________________________
October 4th 2023
“We do, however, believe that a sector rotation from the large-cap companies to mid-cap and small-cap companies will occur in the second half of the year. These two sectors have lagged the overall market performance YTD and are poised to play catchup. We have been positioning your portfolio(s) to participate.”
-From Q2, 2023 FMG Newsletter
Rally Expansion
Q3 is in the books and the YTD Performance is in:
NASDAQ + 25.1%, S&P 500 + 12%, and the DJIA + 1.1%.
The momentum of this year’s market rally slowed in Q3 with the markets pulling back because of major Wall Street firms downgrading many of the top performing stocks on a price basis. We understood the downgrades as many of the top name companies had been on a tear as it relates to price appreciation. These companies were rebounding from the doldrums of 2022 and traded even higher on the heels of the Artificial Intelligence (AI) come-up. Many of the top mega Tech stocks had appreciated precipitously with some even doubling in value on a YTD basis. Again, we understand the reasoning behind the downgrades, which resulted in the beginning of a market pullback. With a commitment to prudence, we too took some profit in your portfolios to make certain that we would not be overly concentrated in a particular company or industry.
No Good Rally Goes Unchecked
Current rally included….and it certainly got checked in the months of August and September. Many of the high-flying mega Tech companies – Apple, NVDA, META, TSLA, etc. – went into a corrective phase, defined as a drop of greater than 10% from the recent high. As mentioned, we were not surprised that investors consolidated the gains that these companies had delivered in the first six months of the year. It simply made sense to “take some off the table.” This profit taking has put downward pressure on the overall market. To add to the slumping equity markets came weakness in the bond market. For the first time in history, U.S. Treasuries were downgraded by the rating agency, Fitch. The agency suggested that the U.S. debt load was unreasonably high and that the cost of capital – the expense that the Government will be obligated to pay to finance the debt load – would be a challenge, particularly given the unlikeliness of the ability of the Government to raise taxes to fund this expense. Also, the agency suggested that the discord in the Congress and Senate would prove problematic to get much done to rein in spending. Undoubtedly, the downgrade sent the price of Treasuries lower resulting in the highest rate on the 10-year Treasury in 15 years. Add to that, mortgage rates rose above 7% in August, the highest in 23 years. High rates of any kind have an inverse correlation with the equity markets. While we witnessed the “Seasonable Summer Slowdown,” typically August through September, this year’s slowdown was further exasperated by a confluence of issues including the higher rates on U.S. Treasuries, high mortgage rates, and of course the Federal Reserve’s efforts to contain inflation by raising rates. These issues resulted in August turning in the first negative performance of the year.
We entered September with the knowledge that, historically speaking, it is the worst performing month of the year for the markets. It certainly lived up to its reputation, turning in the worst monthly performance of the year. What happened? Well, in addition to the usual seasonal slowdown, the markets took further hits given the plethora of negative headlines throughout the month.
Wall of Worry
To add to the continued high interest rate environment, we also experienced a spike in gas prices, higher food prices, the United Auto Workers strike, and the constant threat of a government shutdown. While the Federal Reserve chose not to raise rates during September’s monthly meeting, there were many reasons to believe that inflation would continue to be a problem going forward. As mentioned, gas prices continued to trend upwards. Add to that, it is just a matter of time before higher labor costs (as a result of the many strikes) will soon factor into inflation rate along with higher rent costs across the country. All told, this inflation battle has, and will continue to take a toll on the economy. Furthermore, we have consistently warned that the commercial real estate market will bring additional pain to the banking sector. Occupancy rates in key cities continue to be abysmal given the “remote working” phenomenon. It is projected that some $1.5 trillion in commercial mortgage loans that will come due in the next three years are under water. It is just a matter of time before we see loan payments missed and/or restructured at the expense of the already tenuous bank balance sheets. We do not see this ending well, and more than likely will shake confidence.
During the August and September doldrums, we did add to positions when stocks sold off. We were not willing to fully commit to markets given the aforementioned challenges. We did, however, take advantage of the pullback and added positions in companies and industries that had not participated in the first-half rally. We believe that the underperforming companies and industries we targeted will benefit from the sector rotation and will increase in value in Q4 as they play catch up to the rest of the market.
The Way Forward
Two thirds of market “gurus” polled believe that the markets will trend higher in the fourth quarter, present company included (not that I consider myself a market guru!). While we remain bullish on the economy and the markets, admittedly, this is the least bullish we have been in a very long time. However, as we have said in the past, and will say it again here, the U.S. economy and the markets have historically been resilient. We think now is no different. Despite the noise and headwinds - the war in Ukraine, U.S./China tensions, domestic political discord, just to name a few - we remain cautiously optimistic that the economy and the markets will continue to recover. We have said repeatedly that the markets move in excess. Markets tend to trade higher than they should in good times, and lower than they should in tough times. We believe that is where we are approaching – excess negativity. The immediate question is, what could be the catalyst to resume the upward trend and put stocks back on the upward trajectory? In addition to the current environment of “excess negativity”, we believe that the market is oversold. At the end of the first half of the year the S&P 500 was up 18%. It has since given a third of that back, ending Q3 at +12%. That is a pretty significant pullback even factoring in the many challenges we have highlighted. A recent report out of Goldman Sachs indicates that, given this pullback, and factoring in the coming benefits of AI, Tech stocks have not been this “cheap” on a valuation basis in six years. We see a near-term “bounce” forthcoming. We suggested that the market rally would expand, and that certain stocks and industries would play “catch up” to the rest of the market performance. We were a bit early on this call given that this did not happen in Q3. We do, however, believe that this will occur in Q4. We continue to position your portfolios to take advantage of this rotation. Stay tuned!
As stewards of your capital, it is FMG’s objective to preserve your wealth while delivering returns that, over the long term, will enable you to attain your financial goals. That has not and will not change.
As always, feel free to contact us to discuss your specific portfolio(s) and financial situations. We appreciate your vote of confidence, we thank you for allowing us to serve you, and wish you many happy returns!
Ivan Thornton
Managing Partner, RIA
____________________________________________________________________________________________________
June 5th 2023
History has repeatedly shown that not only do markets rebound from their lows, but in time, have always rebounded higher than their previous highs.
From Q1, 2023 FMG Newsletter
The Rebound Continues!
What a first half of the year it has been:
DJIA + 3.8%, S&P 500 + 15.9%, and the NASDAQ + 31.7% (best first half performance in 40 years). A welcome reprieve from the dark days of 2022. And, we have reason to believe there is more to come!
As we entered the second quarter of the year, we suggested that a pullback in the markets was forthcoming. After all, we experienced a healthy rally of the lows at the end of the first quarter and thus felt that a market consolidation was in order. We suggested that the pullback would be short-lived and that the markets would resume their upward bias before long. We took advantage of the pullback and added positions in companies that had not participated in the first quarter rally. Given the market’s performance year-to-date, this strategy is surely paying off for your portfolio(s). While we did add to positions during the April pullback, we were not willing to fully commit to markets as we felt that the meltdown in the banking sector that we were experiencing had not totally run its course and another shoe would drop. Well, sometimes being right is not such a good thing. We ultimately got that second shoe to drop when the Federal Reserve liquidated First Republic Bank, the second largest bank failure in U.S. history. Yet another West Coast commercial bank that fell victim to its leadership’s hubris. The markets took a brief sigh of relief as JP Morgan took control of the failed entity and the Fed suggested that they did not see other financial institutions headed in the same direction and that the damage was thought to be contained. That projection did not last long. Soon after, Pacific West and Western Alliance dropped some 65% in value as they too experienced a run-on deposits out of concern for their respective financial health. The continued turmoil in the regional bank sector roiled the financial markets and thus spread, sending the overall markets into yet another tailspin. We warned last quarter that the banking industry will continue to face challenges. We believe that the commercial real estate market will bring additional pain to the banking sector. The average national occupancy rate stands at a historical low of 50%. Worst hit are San Francisco and New York City where occupancy rates hover around 35%. This is not sustainable. It is projected that some $1.5 trillion in commercial mortgage loans that will come due in the next three years are under water. It is just a matter of time before we see loan payments missed and/or restructured at the expense of the already tenuous bank balance sheets. We do not see this ending well, and more than likely will shake confidence. We will continue to avoid this sector and look to make money for you in other places.
Last quarter we suggested that the Fed would slow its rate hikes and cease its anti-inflation battle. The good news is that in the first week of May, the Fed increased rates by only one quarter of one percent as opposed to a half of one percent. A true confidence builder. In June, the second quarter economic data reports provided further affirmation that the Federal Reserve’s anti-inflation efforts were continuing to pay off. Consumer spending showed signs of slowing, the housing market cooled because of higher interest rates, while unemployment remained steady. Inflation was reported at an annualized rate of 4% in the second week of June, the lowest in two years. Given that the inflation rate slowed, the Federal Reserve paused additional rate increases. The Fed indicated that it was done with interest hikes for the time being but will visit this strategy should it need to. As a result of the successful inflation fight, the markets have responded favorably. The end of the Bear Market was declared in early June when the markets traded 20% above the market lows that were put in at the end of 2020. It has been a good run up year-to-date from the dark days of 2022. We see further movement to the upside.
A Special Note: Artificial Intelligence (AI), Fad or Future?
One of the key drivers to the market’s bull run has been the focus on Artificial Intelligence. AI is clearly the new buzzword that has captivated the Wall Street vernacular and has set the stock market abuzz. The science promises to lead a long-term drive to new innovative capabilities and improve efficiencies across many genres. Its application is seen as a profound gamechanger in most all of what we do from life science to academia, to engineering and much more. As per the brightest minds in science and technology, the potential advances with AI are nothing short of explosive. Many suggest that the comeuppance of AI is far more substantive than that of the internet, the Dot-Com Era, and the smartphone. We have no doubt that this technological breakthrough will be disruptive in many ways. The question for us is, how do we make money for our clients with it? The key to participating in the potential growth of AI is to make certain to have, at a minimum, exposure to what is referred to as the “Magnificent Seven.” That being the top seven companies with exposure to AI – Apple, Microsoft, NVIDIA, AMAZON, META (Facebook), TESLA and Alphabet (Google). Undoubtedly as clients of ours, you are familiar with these companies as they have been a part of your portfolio for years. Moreover, we also have indirect exposure to AI via the various Exchange Traded funds in which we are invested. Your portfolio(s) are well positioned to benefit from this coming phenomenon.
The Way Forward
At the close of Q2, several Wall Street analysts began downgrading many of the large cap Tech stocks that have led the current rally. Can’t say I blame them given the tremendous run that many of these companies have had YTD. The key drivers are the run up in the market are companies we are well familiar with and are proud owners of including the likes of META, Apple, NVDIA, Google, etc. Having said that, the good news is that, as clients of ours, you have benefitted from this run. We understand these downgrades in the near term given the price run up. However, as long-term investors, we are not selling out of these positions. While we have used this run-up as an opportunity to trim positions (sic, take some profit), we continue to view these companies as industry and market leaders for many years to come. We do, however, believe that a sector rotation from the large cap companies to mid-cap and small-cap companies will occur in the second half of the year. To take advantage of this shift we have been deploying capital into midcap and small cap stock ETFs. These two sectors have lagged the overall market performance YTD and are poised to play catchup. We have been positioning your portfolio(s) to participate. As for the overall market pullback, we do not believe it will last long, nor do we believe it will be severe. As we have said in the past, and will say it again here, the U.S. economy and the markets have historically been resilient. We think now is no different. Despite the noise and headwinds - the war in Ukraine, U.S./China tensions, domestic political discord, just to name a few - we remain cautiously optimistic that the economy and the markets will continue to recover.
As stewards of your capital, it is FMG’s objective to preserve your wealth while delivering returns that, over the long term, will enable you to attain your financial goals. That has not and will not change. As always, feel free to contact us to discuss your specific portfolio(s) and financial situations. We appreciate your vote of confidence, we thank you for allowing us to serve you, and wish you many happy returns!
Ivan Thornton
Managing Partner, RIA
_________________________________________________________________________________________________