February Market Update

For the investor looking for market details and explanations, this February Market Update article is for you.  Broad market index and tech stock investors were in command throughout January, even as the month ended with a Federal Reserve (Fed) meeting taming some potentially over-enthusiastic March rate cut bulls. 

 

With the tech and major market index rally continuing its run since November, I thought now would be a good time to inform you of the latest developments set to impact Americans in the months ahead. 

 

Major Stock Indexes

 

January was good for long-term investors in U.S. stocks, especially in large tech with AI exposure.  If you haven’t heard of Nvidia before, you will from now on.  Market bulls (ie, investors expecting the market to continue its run upward) were cheering the prospects of a more accommodating Fed in 2024, with the rate decision and Fed statement happening on the last day of the month. 

 

For the month of January, the S&P 500 added 1.59%, the Nasdaq 100 tacked on 1.82%, and the Dow Jones Industrial Average rose by 1.22%.

 

Mixed/Slowing Inflation Signals

 

The overall trend for inflation was mixed in January, even as Consumer Price Index (CPI) data came in a bit hot.

 

CPI: The December Consumer Price Index showed a 0.3% monthly increase in December and a 3.4% increase versus one year ago. Estimates were for a 0.2% monthly gain in December and a 3.2% gain year-over-year. Shelter and services pricing remained sticky.

 

PPI: For December, the Producer Price Index report came in below expectations, indicating mixed signals on the inflation front.

 

According to the report, wholesale prices declined by 0.1% month-over-month in December, lower than the expected gain of 0.1% estimated by Dow Jones economists.

 

PCE: According to the most recent Core Personal Consumption Expenditures (PCE) release, the rate of price increases slowed down as 2023 came to a close. 

 

The Fed’s preferred inflation indicator showed that prices were higher by 0.2% month-over-month in December and by 2.9% year-over-year. Dow Jones economists had expected respective increases of 0.2% and 3%. However, digging a little deeper and looking at the three and six-month averages of Core PCE on an annualized basis, we see it running under 2% (note: the Fed’s Target is 2%). This data, noted by former Vice Chair of the Federal Reserve Lael Brainard and provided by the Bureau of Economic Analysis, has inflation watchers cheering the current market environment.

 

Fed Put?

 

In plain English, a “Fed put” means that the Fed is standing by to change policy if needed, should the equity markets experience declines.  At present, it feels like there are the makings of a Fed put under the market. If storm clouds arise, the market is expecting the Fed to “come to the rescue” with rate cuts in 2024 if needed.  The market was expecting six rate cuts in 2024 before the January Fed meeting, even though the economy has been performing well as of late. This outlook is not the norm. Historically, rate cuts are seen in struggling or downtrodden economies that need stimulation.  The January Fed meeting tempered expectations for a March rate cut, with probabilities declining from 50% to 35.5% on January 31. However, it is still early in this election year, so pay attention.

 

This idea of a Fed put is a concept, not a guarantee, and seemed to be on the mind of many market participants at the start of February, indicating that the collective market mindset could be that any pullbacks may be short-lived.

 

Treasury Yields Steady in January

 

The widely monitored 10-year Treasury note yield was close to unchanged for the month of January, closing the month near 3.966% — about 10 basis points higher than December’s closing level near 3.865%.  This is the yield most closely tied to the movement of mortgage rates, so it is watched closely.  January marks two consecutive monthly closes below 4.00% in the 10-year yield.  The steadiness in rates is good news for sidelined prospective mortgage borrowers and great news for long-term investors in U.S. equities.

 

Fed Rate Decision

 

The last day of January gave us the first Fed meeting of 2024, as the Fed left interest rates unchanged in line with market expectations.  There were some changes to the Fed’s statement, however, as Federal Reserve Chair Jerome Powell seemed to want to tame the market’s excitement for a March rate cut.  “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to cut rates,” Powell said.  The verbal statement indicating that a March rate cut is not likely poured some water on the fire of potentially overly enthusiastic stock market bulls as the major averages pulled back during and after Powell’s commentary.  Powell did signal rate cuts at some point in 2024, however.  “It will likely be appropriate to begin dialing back policy restraint at some point this year,” said Powell.

 

Pretty vague, huh?  Fed-speak is one of the hardest languages to learn!

 

Consumer & Employment Strong

 

Consumer health metrics remained strong during January, even as many analysts expect the consumer to “tap out”.  At the same time, labor market data exceeded expectations for December, showing 216,000 jobs created. Government jobs and health-care-related fields led the way.

 

Starting the month of February, the latest employment report blew away all expectations, showing 353,000 jobs created in January versus 185,000 estimates by Dow Jones. The labor market continues to surprise to the upside, and the market reaction was an interesting one.

 

January Labor Data Market Reaction

 

While the massively better-than-expected January jobs data indicates a stronger economy, it also shows that the economy may still be running hotter than the Fed wants to see. This reinforces the logical probability that a March rate cut could be off the table.

 

Major U.S. stock indexes didn’t seem to mind, though, as they cheered the data by trading to the upside on the day of. The jobs report was released the morning after positive earnings results from Meta (Facebook), Microsoft, and Amazon. So, perhaps this earnings effect outshined the March rate cut odds everyone seemed to be so fixated upon just a day before.

 

The probability for a March 25-basis-point cut was all over the place at the end of January and beginning of February, resting at a 20% chance on February 1 after sitting at a 46.2% chance on January 26th, according to the CME FedWatch Tool.

 

Is the economy still too hot? What do the continuing and massive upside surprises in the job market mean for inflation?  This is interesting data for short term speculation, but as you have heard many times in the past, short term data is not very helpful in making long term decisions with your investments.  Pay attention to these data points, if you find it interesting, but don’t let any of it sway you from your financial planning course.

 

Is the Debt Ceiling Bringing You Down?

What does the U.S. debt ceiling debate really means for you? I am getting this question regularly, which means it is probably on the minds of many more folks.  As potential threats loom large, we’re seeing articles in abundance, explaining where we’re at, how we got here, and what to expect next.

We wouldn’t be human if we didn’t share in your frustration over the maddening lack of resolution to date. It’s stressful to watch huge, consequential events unfolding, over which we have no control. And who needs more stress in their life?

Which is why we encourage you to think of your investments as a bright spot of relief in an otherwise unmanageable world. In the face of everything we cannot control, the one place you can call your own shots is within your well-structured, globally diversified investment portfolio.

And here’s more good news: As an investor, you don’t really need to know that much about the real-time details of the debt ceiling negotiations. Instead, as with any other breaking news, a healthy degree of arm’s length disinterest will likely serve you best, especially if you might otherwise respond to the current fever pitch of news that’s news because it’s in the news.

To illustrate, let’s look behind three different doors to consider your most advisable investment strategy under various outcomes.


Door #1: Opportunistic Agreement

With history as our guide, it is perhaps most reasonable to expect today’s political brinksmanship-as-usual will lead to some form of resolution, probably arriving at the last possible moment. This is exactly how the debt ceiling debate has played out on multiple occasions, with each side of the isle using it as an opportunity to score new political points, and there is no reason to think this time will be any different.  Then what? Most likely, the “fix” will be partial and imperfect, and the hand-wringing will continue apace over the next challenges inherent in the latest patch.  The self-preserving nature of the Congressional representative role seems to always come through to make sure the economy doesn’t screech to a halt.  The talking points might shift, but markets will remain as volatile and unpredictable as ever. In this most likely scenario, we would advise …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.


Door #2: Meltdown

What if negotiations in Washington fail? What if we experience U.S. credit rating downgrades, debt defaults, and unpaid Social Security benefits (to name a few of the uglier possibilities)? In a worst-case scenario, the U.S. dollar could lose its global currency status, a position it’s held since before most of us were born. What then?

If a worse- or worst-case scenario occurs, our marvelously efficient markets would once again respond by pricing in the good, bad, and ugly news well before we can successfully trade on it. Global diversification would be as important, if not more critical. Selling in a panic as markets adjust to the worsening news would remain as ill-advised as ever. In other words, your advisable course would remain …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.


Door #3: Proactive, Compromising Agreement

Last, and probably least likely, what if Washington defies our doubts, and achieves a happy and timely debt ceiling resolution, with little to no harm done? Hey, anything is possible. In this best-case scenario, the breaking news would be better than most of us expect, so markets would likely respond at least briefly with better-than-expected returns, rewarding us for staying put. At the same time, just in case the next bit of news were to disappoint, or even be less exciting than expected, we’d want to temper any concentrated market exposures by, you guessed it …

Staying invested in your carefully constructed, globally diversified investment portfolio, structured for your personal financial goals and risk tolerances.

This is by no means a perfect hedge against black swan events, but it’s a good start and would allow for some long-term benefits by taking advantage of stocks in decline through strategic rebalancing.  We would be happy to offer more insights and analysis about the debt ceiling if you are interested in learning more. We’re also here to review your portfolio mix any time your personal circumstances may warrant a change. Otherwise, guess what we would advise you to do while the debt crisis continues? If you’re not sure, please give us a call. We always enjoy hearing from you!

Quarterly Letter to Clients

The first three months of the year would not be described as boring by any stretch of the imagination.  With the war in Ukraine continuing to create global uncertainty and the government-assisted closing of two of the largest regional banks in history, there is plenty to capture our short-term focus.  But even with these and other events, many stock indexes are up since early January and bond prices have seen some recovery as interest rate pressure has eased a bit. The point is that sometimes investment returns can tell a different story than does the current headlines.

However, whether the numbers are up or down in any given year, we caution against letting them alter your mood, or as importantly, your portfolio mix. Because, when it comes to future expected returns, short term performance is among the least significant determinants available.

Thumbs Down…Thumbs Up

In the thumbs-down category, U.S. stock market indexes1  turned in annual lows not seen since 2008, with most of the heaviest big tech stocks2 taking a bath. Bonds fared no better, as the U.S. Federal
Reserve raised rates to tamp down inflation. The U.K.’s economic policies3 resulted in Liz Truss becoming its shortest-tenured prime minister ever, while Russia’s invasion of Ukraine and China’s continued COVID woes kept the global economy in a tailspin. Cryptocurrency exchanges like FTX4… well, you know what happened there.

On the plus side, inflation has appeared to be easing slightly, and so far, a recession has yet to materialize. A globally diversified, value-tilted strategy5 has helped protect against some (certainly
not all) of the worst returns. An 8.7% Cost-of-Living Adjustment (COLA)6 for Social Security recipients has helped ease some of the spending sting, as should some of the provisions within the newly enacted SECURE 2.0 Act of 2022.

Recency Bias

Now, how much of this did you see coming last January? Given the unique blend of social, political, and economic news that defined the year, it’s unlikely anything but blind luck could have led to accurate
expectations at the outset.

 In fact, even if you believe you knew we were in for trouble back then, it’s entirely possible you are altering reality, thanks to recency and hindsight bias. The Wall Street Journal’s Jason Zweig7 ran an experiment to demonstrate how our memories can deceive us like that. Last January, he asked readers to send in their market predictions for 2022. Then, toward year-end, he asked them to recall their predictions (without peeking). The conclusion: “[Respondents] remembered being much less bullish than they had been in real time.”

In other words, just after most markets had experienced a banner year of high returns in 2021, many people were predicting more of the same. Then, the reality of a demoralizing year rewrote their memories; they subconsciously overlaid their original optimism with today’s pessimism.

What have we learned?

Where does this leave us? Clearly, there are better ways to prepare for the future than being influenced by current market conditions, and how we’re feeling about them today. Instead, everything we cannot yet know will shape near-term market returns, while everything we’ve learned from decades of disciplined investing should shape our long-range investment plans. 

In other words, stay informed but be careful to not be swayed into a reactive decision. Keep your long-term lenses on and your future self will thank you for it.
 

As we head into a new quarter, always know that we are here to help and are grateful for your
continued trust.

Josh

 

April 2020 – Quarterly Update: Covid-19 Edition

This will be the quarter that we look back on and never forget.  It was the time that a virus spread with a silent vengeance, and the world came to a screeching halt.  You may be feeling quite disoriented, fearful or even anxious as you read this note since ‘normal’ for all of us has been shaken to its core due to Covid-19. You are likely hunkering down at home, which is what you should do, with little of your regular activities to keep you busy.  If you are like me, it literally feels like the earth has stopped spinning on its axis.  Up is down, and right is left.  Trust me when I say that it is completely normal to feel this way in the context of what we are dealing with as a human species.

I do not come to you with answers or any conclusions that will change the world…there are people that are much smarter than me working on that now, and I have confidence that they will figure it out.  But I can bring some encouragement and suggest some small actions that might, just maybe, help us feel like planet earth is starting to rotate once again.

What can you do?

The spread of Covid-19 has impacted the global economy with a speed and impact that is unlike anything seen in our lifetime.  This does not mean that happiness and contentment are totally out of your control, however.  Mindset is key…start by realizing that the sun still rises every morning like the picture at the top of the article.  There is new hope with each new day.  I am sure you have found, as have I, that there is now more time to watch movies, read a book, take a distance-appropriate walk to enjoy the spring weather or call someone (yes, actually call them rather than text) to see how they are doing.

If you are sheltering at home with loved ones, you have probably seen them more in the last two weeks than you have for months.  We should all continue to do more of these things, and the more we do, the more connected we will stay.  I am not a loquacious extrovert, but I have thoroughly enjoyed being around and talking with the ones I care most about.  And the more connected we stay, the more human we will feel.  This is where happiness and contentment hide, not in your investment portfolio or the latest round of news.

What are we doing?

Actions taken during times of fear in the markets will have implications for years to come.  The question is whether they will be positive or negative.  For the long-term investors, which are clients that we serve, volatility creates opportunity.  We have taken advantage of this opportunity by tax loss harvesting, which allows us to realize the losses for tax savings, but then invest the proceeds right back in something else so the money is never out of the market.  The tax savings for our clients this year will be significant.  We have also looked to strategically rebalance portfolios.  Because some of the fixed income assets have gains over the last year, we have sold those gains to go buy equity funds that are now at a discount.  It rebalances the ship and holds to the strategy of selling high and buying low.

What is next?

The fact is, I don’t know.  No one does, but that’s OK.  We are still waiting on the details of the massive Stimulus bill that was signed into law on March 27th.  There are too many details for me to summarize here.  If you want a deep dive in to the details, you can find that here.  I plan to write more on this soon, but if you have any questions about this, please do not hesitate to call our office.  We are all working remotely, but the extensions still ring right to us.  Know that we are here to help in this time of uncertainty.  Your well-being is of greatest concern to us, and not just financially.  Be safe, be smart, and be part of the global solution for everyone by staying home.

We will see you soon,

 

Josh, Mike, Matt and Sandra

A Covid-19 update from your PLC Wealth team

To say the last couple of weeks have been unexpected, unparalleled and dizzying would still be understating exactly what we have lived through in the last few weeks.  Based on further news today (specifically, the Stay at Home Orders issued by Wake County, NC for our local clients), most of us will be sheltering in place for the coming weeks, as we should.  I have listened intently, as I am sure you have, to all sides of the discussion that has carried on since the beginning of the outbreak.  At this point, the experts are making the case for the seriousness of the virus as it spreads exponentially, and that it is likely that the healthy and optimistic among us could be putting our most vulnerable at risk.  Slowing down our movement even further, whether by choice or by requirement, seems to be inevitable for a while longer to give us all the best opportunity to get through this.  While we do not know how long this Covid-19 virus will last, I want to take a few moments to speak to you directly about what we are doing as a firm and how you can continue to reach us during these times.

We have implemented many changes in the last couple of weeks as part of our Business Continuity Plan due to Covid-19.  Thankfully, we were prepared for a remote working environment, and hopefully you have seen no interruption in the normal service from our team.  We have all set up our home workspace.  This give us access to our email, phone calls, and client files just as easily as we have them in the office.  Our phone service is fully digital which means we can take it with us wherever we go.  If you call the office and dial my extension, it will ring my mobile phone.  If I call you from my mobile phone, I will be doing so from my office line.  We also have a fully digital and secure document management system for our firm which means we can safely access all your files at any time of day from any location in the world.  Additionally, all our portfolio management, financial planning and client relationship software is cloud-based and accessible from any location.  Believe it or not, it really did not take much time for PLC Wealth to convert to a virtual firm with the same capabilities as when physically in the office.

Now, obviously, there are some challenges.  It is impossible to fully replace the face-to-face relationship, both for our internal operations and for our client relationships.  We are utilizing a secure and compliant messaging tool for internal communications.   While there may be times that we need to access the office, we are attempting to have only a 1-person max in the office at any time.  We will also plan to continue with client meetings moving forward through virtual meeting technologies such as Zoom.  If you do not have access to a computer for such a meeting, we can still have a conversation the old school way…over the phone…in order to make sure that we do not fall behind in our relationship with each of you.  Again, if you need us in the meantime, we are an email or phone call away, just as we have always been.

There are a few logistical items to cover: First, mail will be checked regularly, but maybe not every day.  Additionally, we have always made the effort to suggest linking your personal bank account to your brokerage accounts to allow for quick money movements back and forth, should they be necessary.  Since we are no longer at the office, a time like this makes it necessary.  So, if you need to make an IRA contribution or want to add funds to your brokerage account, we can still do that by an electronic transfer.  Getting money from your accounts is just as easy, or we can have a check mailed to you.  The bottom line is that getting money from your accounts or to your accounts is just as easy as always.  Finally, if you have actual stock certificates, those must be mailed directly to TD for deposit in your account, so just let us know if you need the mailing address.

Unfortunately, times of crisis create opportunities for bad actors.  There are already stories of scams coming to the surface, so be prepared and know what to look for:

 

  1. – There are no miracle drugs or remedies for Covid-19 at this time so don’t fall for this one.  And do not click on any links that may be in an email stating such things, as the link may be another way to inject a virus on your computer.
  2. – Be very skeptical of any investment ‘opportunities’ with research claims that are no supportable.  People will make wild claims to prey on other’s hopes and inability to use the rational brain in times of stress.
  3. – Never, never, never disclose your social security number, account numbers, or any other piece of Personally Identifiable Information (PII).  There are rumors that spam calls and emails are already going out claiming that thsi information is needed to get your piece of the Stimulus bill or a tax refund.  Hold on to your PII like you (financial) life depends on it.
  4. – Generally, just be skeptical in these times of anything that seems too good to be true.  If you are not sure, get in touch with us to talk through it.

 

Let me leave you with a little encouragement in the midst of Covid-19 .  Take this time to do something that many of us no longer do naturally on our own…slow down, exercise (by yourself), rest, re-energize, call someone you haven’t spoken with in a while, or binge watch movies with your family that you never have the time for…but mostly, just look around you to see all of the blessings that you inevitably still enjoy.  Sometimes, when we are not able or willing to do that which is in our best interest, it is necessary for it to be forced upon us.  We find ourselves in one of those times in history.  We are a creative and adaptive species so I look forward to hearing about some of the ways that you will get through this…because you will get through this.  I will leave you with three pieces of advice that I am confident will be good for you in the long run…Wash your hands, don’t touch your face, and don’t touch your stocks.  Know that we are committed to continuing to serve you and your family. We will strive to provide you with an even higher level of service than that which you have come to expect from us.  If you need anything at all, even if it is just to have a conversation about the events of the day, please let us know.  We are here to help.

Carpe diem,

Josh and the PLC Wealth Team

What do the tea leaves say today?

If you’ve taken our past advice about ignoring the onslaught of breaking market news, you probably didn’t read Russell Investments’ recent “2017 Global Market Outlook Q4 Update.”

I’m not prone to pore over these relatively unremarkable analyses ourselves, but I do read a lot of ‘industry speak’ as part of our due diligence. More times than not, it for purely entertainment purposes to see what the tea leaves say on that particular day.  This is how I came across this intriguing statement in Russell Investments’ wrap-up:

“Our main message for the close of 2017 isn’t much different from our opening one: we maintain our ‘buy the dips and sell the rallies’ mantra.”

Great idea, but a little weak on practical application. It’s akin to suggesting that lottery players can score big … as long as they consistently pick the winning numbers!

Immediately following Russell Investments’ mantra, you’ll find this disclosure:

“These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.”

In all seriousness, I feel these sorts of reports speak inadvertent volumes about the evidence-based mantra to which we adhere.  If you are not familiar with this term evidence-based investing, be on the lookout as I will be writing more about this soon. It is a main tenant to the way we view and implement investment strategies.  By depending on practical evidence instead of fanciful forecasts, our views are rarely subject to change – especially not in hurried reaction to current market conditions.

Instead, we continue to believe the best way to manage your personal wealth is to:

  • Stay laser focused on your bigger picture…are you on track to achieve your goals. Buy, sell and rebalance your portfolio according to your own carefully crafted plans.
  • Focus on an efficient, evidence-based approach to capturing the market’s durable returns while managing its related risks.
  • Ignore the market’s daily distractions, especially its fleeting dips and rallies; they’re far more likely to block the view toward your higher goals than to yield big wins through the chase.

This is our mantra, and so it shall remain – regardless of the date at the top of the page.

On Brexit

“Democracy is the worst form of government, except for all the others.”

 

It’s ironic to me that this quote is associated with Winston Churchill, considering all the going’s on in the last 24 hours within his home land.  As you no doubt have heard, the unlikely occurred and voters in the United Kingdom voted to leave the European Union after 43 years of membership.  The uncertainty that this casts on economies around the globe has caused stock, currency and even some bond markets to behave erratically today.  

 What I want you to know is that all is not lost, the sky is not falling, and the world as we have known it is not over.  I walked out of the house the morning for an early morning run, and you know what I heard?  The same thing I hear on every other morning…the birds were alive and chirping, the wind blowing through the trees which had been replenished with an overnight rain, and oxygen still filled my lungs just like it has on every other day.  It reminded me that we have to concern ourselves with things that we can control, and remove worry around events that we have no control over.  Brexit is one of later mold.   

 What does this mean for you and me?

The fact is I don’t know…no one does.  There is so much still yet to be determined.  The voters have made their voice known.  Now it is up to Parliament to move forward and negotiate the details of their wishes.  There will be months, if not years, of new negotiations between the UK and the EU and other trade partners.  Any conclusions around what these new trades deals will look like and the impact on global economies is purely speculation at this point.  But the fear and uncertainty in the ultimate conclusion is exactly why markets are behaving so erratically today, and probably for some days to come.  The value declines do not mean that the markets think the world is collapsing…it just means that they don’t know what is going to happen, so ‘traders’ are acting on emotion, fear and possibly greed.  These are never good ingredients for a long term investor’s strategy.  But I do know that this vote should not change the course of your long term plan.

 Trader vs. Investor

A trader is actively trying to time the market, moving in and out of investments based on one data point or another.  The research shows this has never been a consistent winning strategy over time.  An investor follows along with Warren Buffett’s favorite holding period for investments: forever.  Be an investor, not a trader.  I think Warren knows what he’s talking about.

 What should you do?

The best thing you can do for your self is exactly nothing.  Short term market movements do not change the course of your long term plan.  Remind yourself where you stand in regards to your long term goals.  Log in to our planning site, MoneyGuidePro, and see if your progress towards your goals has changed at all. [Note: if you do not yet have a financial plan built, let us know sooner than later.  This tool is extremely important to ensure that you are getting the maximum return on life (ROL) and always moving towards your goals.  This is much more important than worrying about your return on investments (ROI)] I assure you that your probability of your plan success has not changed.  The reason is that the probability calculation takes in to account the possibility of wild short-term (and even mid-term) volatility already!  

 Volatility = Opportunity

You have heard this from me before…where there is fear and volatility in the short term, there is opportunity to buy things on sale for the long term investor.  We are always looking to see if volatility in certain asset classes creates enough skewing in a portfolio to provide a strategic rebalancing opportunity.  This pays dividends in the long run.  If you have cash that you have considered investing, pay attention.  If the volatility continues, you will have a unique opportunity to buy a good, long term asset at a discount.  

 Let me reiterate again…the best thing you can do for yourself is exactly nothing.  If your portfolio has been allocated correctly based on your time horizon and your risk tolerance, you are still on the right course.  Turn off the TV, ignore the pundits, and look around you…the air still fills your lungs too, just like it did yesterday, and the sun still rose the same this morning as every other day.  Life is good, so enjoy your weekend. We are always here to talk, so do not hesitate to call or email with any questions.  

 Josh