October 3rd 2024
“…the broader market is poised to play catch-up. While we continue to be constructively bullish, let us be clear, challenges remain. We are still faced with geopolitical unrest, domestic discord, and a forthcoming contentious presidential election.”
-FMG Q2 Newsletter
Market Overview
Q3 is in the books. The YTD returns are as follows:
DJIA 12.32%
S&P 500 20.30%
NASDAQ 21.17%
FMG CORE 28.50%
The Sector Rotation we had been calling for all year went into full effect in July. “Sector Rotation is the lifeblood of bull markets,” as the saying goes. Why is that, you ask? Market expansion elongates the bull run. Most bull markets start in a concentrated sector (Big Tech for this one) and then branch out to other areas such as Small Cap, Value, etc. While the Tech trade has been the driver of performance year-to-date making up some two-thirds of the market’s performance, the broader market is now playing catch-up as you can see in the performance return of the S&P 500 (broad market) vs. the NASDAQ (technology). Having said that, with the sector rotation that went into effect in the second week of July, Small Cap stocks drew interest from investors and finally snapped their malaise and had their best week since 1995. Small Cap stocks benefit most from a decrease in interest rates. With news from the Federal Reserve indicating that inflation was coming down, this bodes well for the potential of a cut in interest rates. Small Cap stocks are heavily dependent on borrowing so a cut in rates would decrease their cost of capital, and thus improve their earnings trajectory. Value stocks also got in on the market rotation. Value stocks have underperformed growth stocks since 2020. They have been overdue for a comeback. Given that many investors took some profit from the Big Tech run-up – present company included – they/we rolled profits over to Small Cap and Value stocks as both areas had yet to join the upward movement and had been primed to play catch-up. Your collective portfolios certainly benefited from this strategic move. The Big Tech correction picked up further steam when both Alphabet (Google) and Tesla reported weaker than expected earnings. This sent not only these two stocks down, but also impacted the entire Big Tech sector resulting in the worst trading day of the year. While Alphabet has been and continues to be a core position in our model portfolio, after assessing the earnings report, we made no changes in the position. We also maintain a small position in Tesla.
In both cases, we frankly believe that these two companies will continue to be at the forefront of the technological evolution for many years to come.
If July was recognized as the month of the Great Rotation, August would be considered the Month of the Great Correction…. albeit short lived. In the first week of August, the markets displayed one of the most breathtaking displays of volatility in a very long time. The Federal Jobs Report indicated a sharp decline in the labor force sending unemployment to its highest level in three years, giving way to fears of a recession. Criticism was quickly directed at the Federal Reserve for not lowering rates sooner. The real culprit of this vicious downdraft however was the “Japan Carry Trade.” On the first Monday of August, the Japan market traded down like that of “Black Monday.” Sound familiar? Yes, THAT Monday when the market crashed in 1987. Headlines sent tremors across the globe. Traders and investors waited with great anticipation wondering if the U.S. market would follow suit. When the U.S. markets opened, they traded down significantly, however, not as bad as the Japanese market. What was the trigger? The Japanese Government had raised rates the night before to a level not seen since 2008. This triggered what is known as an unwinding, whereby Japanese institutional investors were forced to liquidate positions in large quantities, affecting everything in their portfolios, which included many U.S. companies. This negativity carried over to the U.S. markets, thus creating the negative Carry Trade. The good news is that this had little to do with our markets, thus the damage was limited. Nonetheless, the volatility was considerable. U.S. markets quickly experienced the correction that we had been calling for. The Tech Sector pulled back greater than 10% from their highs, and the overall market traded down some 6% during the rout. Once it became clear that this occurrence was Japan specific, the markets proved its resilience once again - thanks to the Buy the Dip strategy - and came roaring back. Over the following two weeks, we received a slew of positive indicators that the Federal Reserve’s efforts to bring down inflation were bearing fruit. The CPI showed that inflation had fallen below 3% for the first time since 2021. This provided the clearest evidence yet that the Fed could move to cut interest rates. The markets took this cue and began to rally once again, recouping all the losses from earlier in the month, thus delivering its fourth straight month of gains.
As we have experienced more than ever this year, volatility once again went into full effect. September began with another selloff, which consolidated the gains from the late-August rally. Adding to the pullback were questions regarding a weakening economy and the stall of the AI industry momentum. The first week of September was the worst weekly performance of the year. Alas, after all th starts and stops, and the anticipation and disappointments, in the second week of September, the Federal Reserve finally cut interest rates by one half of one percent. In response, an abundant amount of cash that investors had moved to money market accounts when rates were high came off the sidelines. With rates now coming down, this cash had gone looking for higher returns in other opportunities, mainly the equity markets. The equity markets took off to the upside and hit fresh highs to cap a strong September and third quarter.
The Way Forward
As we go to print, the Wall Street Journal is running a series on the “optimism surrounding the U.S. economy that is sweeping markets higher.” Hmm, being the contrarians that we are, this and other bullish sentiments on display give us pause. We do not want to “throw water on the fire” or “rain on the parade,” but we just think that this fire has burned hot for some time now and that parade participants may want to grab an umbrella. While we remain long-term bullish, we are cautious in the near-term. The Federal Reserve has done its job in bringing down inflation and interest rates. The markets have responded accordingly, resulting in higher market valuations. At the moment, we believe, based on the various valuation tools we deploy, that this market is fully valued. We have said many times, markets tend to move in excess both on the downside and the upside. We believe that this market has moved to the upside at a rate that suggests a market correction is coming. We continue to remain positive on the economy, which will be reflected in market performance, but we believe that this market needs time to digest the many headwinds that exist. These challenges include, but are not limited to domestic political discord, a contentious presidential election and growing international conflict with the Middle East beginning to look like a powder keg. Add to that, Labor unrest with thousands of U.S. dock workers preparing to go on strike. This strike would surely choke off the flow of import and export goods that will cost the economy a projected 3 to 5 billion dollars a day. The supply chain for consumer goods and manufacturing parts would be shut down, thus sending inflation soaring. While your collective portfolios have benefitted from market performance, we would not hesitate to exercise downside protection if warranted. In the meantime, we will look to add to positions should a pullback create investment opportunities. We will be patient. Our job is to constantly be on the hunt for emerging trends, undervalued sectors, special situations and individual companies to take advantage of to make you money. As stewards of your capital, it is our objective to preserve your wealth while delivering returns that, over the long term, will enable you to meet and exceed 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 and thank you for allowing us to serve you.
Ivan Thornton
Managing Partner, RIA
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July 3rd 2024
“We believe that the markets are overdue for a technical correction as stocks appear to be overvalued in the near term. Barring anything unforeseen, we do not believe a technical correction would be severe nor long. We expect continued volatility resulting in a choppy upward trend and the indexes will continue to rise.”
FMG Q1 Newsletter
We got that right! The first half of the year is in the books:
DJIA +3.6%
S&P 500 +14.5%
NASDAQ +18%
We mentioned in last quarter’s Newsletter that we anticipated a near-term technical correction given that the markets had had a significant run without any meaningful pullback to consolidate those gains. Near term technical corrections are quite the norm in market uptrends. The markets had not experienced a meaningful correction in over six months during which time stocks moved higher. Investors had pushed the markets higher given FOMO – Fear of Missing Out. Well, be careful what you ask for! We got that technical pullback in early April. The pullback reminded investors that markets do not go straight up and that pullbacks are painful! In addition to the market having been overvalued and technically extended, inflation remained stubbornly high. The Federal Reserve suggested that any thoughts of a projected rate cut would not come anytime soon. Clearly this reality disappointed Wall Street and the “talking heads” who had built up the anticipation of rate cuts. We warned against this anticipation as economic data clearly suggests that we are not out of the woods yet. Anyways, on top of the continued inflationary pressure came a spike in oil prices which began to show up at the pump. This put even greater pressure on inflation, thus pushing the markets lower. Add to this, the geopolitical calamity occurring in the Middle East sent markets down even further. All said, April proved to be the worst month of the year.
We received a bit of a reprieve in May when in the first week of the month, economic data reports indicated that the economy was showing signs of cooling, thus mitigating inflationary pressure. Wall Street once again began to talk up the potential of an interest rate cut. This chatter sent the markets higher eight trading days in a row, recuperating all of April’s losses. Companies began reporting their strongest quarterly earnings since the beginning of the pandemic. As well, several companies announced some of the largest buybacks in history which added more fuel to the rebound. By the third week of the month, DJIA made history by trading over 40,000 for the first time ever. Many Wall Street analysts - encouraged by the market’s performance - began to raise their targets on where each Index will trade by year’s end. Again, FOMO kicked in, and the markets traded higher.
The upward momentum in the markets continued in June led by no other than……Big Tech. For starters, NVIDIA reported blow out earnings and announced a stock split. There were several announcements by many of the Tech companies of new, innovative products and services that would further enhance the benefits of AI. Non-Tech specific companies reported strong earnings, thus broadening the market’s rally. Finally, in the second week of June, the Fed’s CPI data was reported and once again indicated that the inflation rate may in fact be falling and the economy slowing. This once again gave the “talking heads” ammunition to talk up the probability of an interest rate cut, thus sending markets to all-time highs.
The Market Rally Broadens
We suggested at the start of the year that the environment is ripe for other companies and industries to follow the lead of Big Tech and generate favorable returns for investors. We stated that we expected a more normal market performance as the expansion of breadth and depth of the market rally took hold. This call is finally coming to fruition. While we continue to enjoy the AI fueled rally in Tech, there are other high-quality companies and industries that deserve attention from investors. Our job is to constantly be on the hunt for emerging trends and undervalued sectors and individual companies to take advantage of. Moreover, given the movement in Big Tech, portfolio diversification becomes important to avoid concentration. We will not be hesitant to reduce exposure in winners if warranted. 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
“Wall Street is Getting More and More Bullish On Stocks.”
“Investors Can’t Afford to Miss the AI Rally.”
Why Wall Street is Seeing Potential for Even Greater Upside.”
Hmm, given our often contrarian perspective, headlines like these from the popular press give us pause. Not to suggest that they are wrong, as we agree with the premise. However, this type of “crowd think” often does not end well. This is a rare instance where we hope we will be wrong. There are many reasons for the bullish sentiment, however. For starters, there is an abundant amount of cash coming off the sidelines that investors had moved to money market accounts when rates were high, known as the “Cash Trap.” With rates projected to come down later this year, this cash will be looking for higher returns in the form of other opportunities, mainly the equity markets. While the Tech trade, led by all things AI, has been the driver of performance year-to-date, making up two thirds of the market’s performance, again, the broader market is poised to play catch up. While we continue to be constructively bullish, let us be clear, challenges remain. We are still faced with geopolitical unrest, domestic discord, and a forthcoming contentious presidential election. Having said that, there remains empirical evidence to support bullish sentiment including continued economic growth, low unemployment, moderating inflation, and robust corporate earnings. While we will continue to enjoy the run in the markets, we will also keep a close eye on the potential for “irrational exuberance” and will thus govern our decisions accordingly.
As stewards of your capital, it is our objective to preserve your wealth while delivering returns that, over the long term, will enable you to meet and exceed 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
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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
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