Quarterly Investment Update – 2nd Quarter 2009
farm-admin • July 6, 2009
QUARTERLY INVESTMENT UPDATE
2 ND
QUARTER 2009
July 6, 2009
Dear Friends and Clients,
Before we get into the investment portion of our update, let’s provide some perspectives regarding basic financial planning considerations with respect to your overall financial goals. We will begin by discussing our portfolio management services as they relate to the overall financial planning industry as well as the overall economy.
As was noted in the past, we have tried to stress the importance of our firm’s portfolio management services and how they relate to the financial planning process. We created Farmand Investment Services, Inc. to provide the fee -only form of compensation for our investment management services and provide the best quality of financial consulting services. We made an intensive effort to stress the significance of all aspects of the overall financial plan -income tax planning, retirement planning, estate planning and insurance planning as well as investment planning. We have always stressed our commitment to you that, as your CPA Financial Planner, you have the most trusted financial advisor regarding your business as well as your personal financial requirements.
We bring this topic, again, because the sad truth is that anyone can call themselves a financial planner. The current economic turmoil that we have experienced during the past year is finally bringing a need to regulate the financial planning industry’s “ethics” and “competence” issues. Unveiling its proposal for financial services reform on June 17, the Obama Administration is calling for reforms in five key areas -including the regulation of investment advisors and broker/dealers. A power struggle in Washington will shape how investors get the advice they need. On one side are stockholders and other securities sales people who work for Wall Street firms, banks and insurance companies. On the other are investment advisors who often work for themselves or smaller firms. Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself, whereas Advisors are regulated by the States or the Securities and Exchange Commission. Congress is considering legislation to break down the statutory barriers that impose different regulations on “brokers” and “advisors” and to have one standard of care, a “fiduciary” standard that applies to both broker-dealers and advisors where both should have a fundamental first responsibility to their customers -the investor.
In our view, the best way to restore the public’s trust and protect the public from unscrupulous or unethical financial intermediaries is to require any financial professional who offers advice to adhere to a fiduciary standard, which places the interests of the client ahead of the interests of those who offer the advice, which has always been an integral part of the code of ethics of the CPA -Financial Planner.
As far as the overall economy is concerned, never, since our inception in 2002, has the obsession with macro economic trends so overwhelmed the interest in fundamental security analysis. Because macro events indeed dominated all returns in all asset classes in 2008, many are incorrectly rationalizing that macro events will exclusively dictate all future performance. At this point and in these incredible times, the purpose and benefit of fundamental security· analysis, as well as disciplined investment supervisory services, actually needs to be re explained, especially to new clients.
First of all, our firm provides Investment Supervisory Services, defined as giving continuous advice to a client or making investments for a client based on the individual needs of a client. Through personal discussions in which goals and objectives are established and based on the client’s particular circumstances, our firm enters into a portfolio management agreement that includes an “investment policy statement” that specifies the level of risk in relation to the client’s targeted rate of return.
Based on that investment policy statement as well as the stated objectives of the client (growth and value, tax efficient, balanced, or income), we begin the process of creating and managing a portfolio that generally has at least a combined asset allocation of 50% equity and 50% fixed income investments.
Our investment strategy for our fixed income asset allocation consists of bonds as well as other investments such as Master Limited Partnerships (MLP), Real Estate Investment Trusts (REIT’S), preferred stocks, as well as high-yielding, stable, large -cap growth stocks. This strategy focuses in providing the required amount of income to accomplish the goals of the client, especially if they are dependent on that income.
Our investment strategy for our equity asset allocation consists of companies that we think will grow and prosper for an extended period and stay with them until they reach their full value. Typically, with bonds or cash, all you get is the income, whereas with growth and value stocks, you also get the potential for appreciation depending on the value of companies we own. The best measure of such greater potential yields is the company’s free cash flow (FCF) yield. This refers to a company’s profits plus depreciation minus capital expenditure. In addition, we achieve diversification by investing in asset classes that range between 20 to 25 different industries. Within each industry, we seek to establish a weighted position by purchasing anywhere between one and five securities. The various asset sectors of each industry are allocated based on the current economic environment as well as the client’s individual goals. We also use mutual funds and/or Exchange Traded Funds of various asset classes in different industries to satisfy the proper allocation requirements, depending on the size of the portfolio as well as the goals of the client.
As far as the investment climate is concerned, the major stock indexes have staged one of the most dramatic turnarounds on record. Since the March 9th lows, the Standard & Poor 500 Index surged almost 40% to a June 12 th closing high of 946.21. The Standard & Poor 500 stock index closed during the second quarter at 919.32, up 15% and 1.8% higher for the year. The quarter marked a period of healing for financial markets around the globe. As investors became more comfortable holding riskier assets, they shifted out of U. S. Government debt. But while the waves of fear that had sent stocks to their lows have abated, the focus now is on the market’s economic and profit underpinnings.
As share prices recover, it is tempting to hope for a return to the “good old days” of 2003 -2007 or even the 1990’s. However, we are not that naive. The financial crisis of the past two years has proved far more damaging than almost any of us foresaw. The housing collapse means that banks will lend hesitantly, and consumers will borrow very carefully for at least the next two or three years -possibly much longer. The federal government is running a mammoth, almost unthinkable budget deficit. Furthermore, President Obama’s healthcare and environmental initiatives, if enacted, virtually guarantee huge deficits far into the future. This is an unsustainable path. Either taxes must rise substantially, or investors around the globe will demand much higher interest rates on Treasury debt to compensate for the risk of inflation. In either case, America’s economic growth rate over the next several years or possibly longer will fall short of what we became accustomed to from the 1980’s onward. Given these sobering facts, it would be unrealistic to look for a smooth, steady stock market recovery stretching out for years on end. Instead, we are gearing up for a market climate that may experience steep, dramatic rallies but, at the same time, we will also have to deal with sharp pullbacks.
As far as our strategy is concerned, we realize that even though the investment climate has radically changed, it still makes sense to keep our core holding of quality stocks and mutual funds. Very few investors can consistently grow wealth by going to the extremes of being “all in” or “all out” of the market. However, it is essential that we continue to be more cautious about our investments by limiting our risk. We do this by paying more attention to individual stocks and mutual funds than the market as a whole. In addition, we take additional defensive measures by taking some profits in some of our over-valued positions and limit our buying to the strongest, safest positions.
Again, thank you very much for the trust and confidence you have placed in our firm and it is always appreciated. Please contact me with any questions or comments.
Dear Clients and Friends, Before we get to our investment update, we would like to point out that we have changed the format regarding the content of this and future quarterly reports. In the past, we sent you the “combined” portfolio balances of all the accounts including the combined performance report as well as the list of individual holdings. We want to expand on the performance report and eliminate the inclusion of individual holdings. These individual holdings are set up to be automatically sent directly to our clients from Schwab. So, there is no need to duplicate this effort. However, we do want to expand on the performance of the portfolios by including the “combined” performance report, but also the “individual” performance report of each account. Everything else will remain the same. We hope you enjoy our new format and we would welcome your input. As far as our investments are concerned, the volatility brought the stock markets down this quarter. This volatility is due to the uncertainty of the effects of tariffs as well as finally understanding that the economy is slowing and perhaps significantly. In effect, all of stock gains made since Trump was elected in November have been erased and we are back at pre-Trump levels. U.S. retail sales rebounded marginally in February as consumers pulled back on discretionary spending. Reinforcing the growing uncertainty over the economy against the backdrop of tariffs and mass firings of federal government workers. Nonetheless, the February report from the Commerce Department last month suggested the economy continued to grow in the first quarter, though at a moderate pace. It sketched a picture of a cautious consumer, with sales at restaurants and bars declining. With consumer sentiment sinking to a near 2 ½ year low in March, sales could struggle in the months ahead. President Donald Trump’s raft of tariffs, which has unleashed a trade war, has ignited worries about inflation as well as job and income losses, developments that could undercut consumer spending. Mass layoffs of public workers as part of an unprecedented campaign by the Trump administration to shrink the federal government are also seen hurting spending. A stock market sell-off could curb spending, predominantly driven by high-income households, while rising food prices could squeeze low-income households. At the last meeting in March, the Federal Reserve did what we expected, which is nothing as far as interest rates. However, the Federal Reserve’s quarterly updated summary of economic projections anticipates two quarter-point rate probability that the central bank will drop its rate by 0.75 or less this year. Also, they cut the runoff of their balance sheet, which could let the bond market yields come down. Overall, we continue to feel cautiously optimistic about how the stock market should continue to advance. During the quarter, we took advantage of the volatility by buying one new position in CSX Corp (CSX). We also purchased HF Sinclair Corp (DINO) in most of the taxable accounts but we sold it for a short-term loss for tax purposes. We may want to buy it back after 30 days. As far as sales as concerned, we sold Warner Brothers Discovery (WBD) and PVH Corp (PVH). As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed income and 0%-20% Cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, First of all, we hope everyone had a Merry Christmas and wish everyone a Happy New Year. As far as stocks are concerned, we did not get a “Santa Claus” rally as we were hoping. Instead, December’s performance was the worst month of the quarter. However, as you can see, all of our portfolios are up for the quarter and the year. So now that 2024 is behind us, how do we plan for 2025? Given the broadly healthy economic conditions for a soft landing, we feel that 2025 will produce good earnings reports, which should help the stock market to go higher. At their last meeting, the Federal Reserve did what we expected, they cut interest rates by .25%. However, the tone of the chairman’s voice changed at his news conference. Jerome Powell said that the committee had to readjust expectations due to inflation remaining higher than expected. Inflation reaccelerated in October and November, and core CPI is staying higher than expected and remaining higher than 3%. The expectation for the Federal Reserve is to cut interest rates for 2025 twice by .50%. This lowers the target interest rate range between 4.25% to 4.5% and reflects the Fed’s ongoing commitment to achieving its dual goals of maximum employment and price stability. Thus, there is not much price to earnings (P/E) multiple expansion expected, which implies that the market should be driven by earnings in 2025. The market over the past two years has been driven mostly by P/E multiple expansion due to the very concentrated move in the technology sector. During 2025, it is expected that all sectors of the market will experience earnings growth, especially smaller companies. We feel that the market wants some new stocks to rotate into other than technology. During the quarter, we continued to take advantage of the stock market’s strength by trimming some over weighted positions and some entire positions. We sold our full position in Compagnie Financière (CFRUY) and Alliances Bernstein Holding LP (AB). We also sold one-half of the position in CNX Resources (CNX) and Amazon (AMZN). We put cash proceeds from the sales right into the Schwab Value Advantage Money Fund (SWVXX). The Schwab Money Value Advantage Money Fund is a fund that we use for investing excess cash or for specific restrictions. As far as purchases were concerned, we added one new equity position, Westrock Coffee (WEST). As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, A couple of weeks ago, the Federal Reserve cut interest rates by 50-basis points, making the first interest-rate cut since 2020. It was also the first time there was a dissent from a Fed Governor since 2005, as Michelle Bowman preferred a 25-basis point cut. To make sure we are on the same page, let’s see what the Fed’s updated Dot Plot reveal about where interest rates go from here. The Dot Plot is a graphical representation reflecting each committee member’s anonymous projection of where they believe rates will be in the future. The Fed members update the Dot Plot once every three months. In both the December and March FOMC meetings, the Dot Plot showed a median forecast of three-quarter point rate cuts in 2024. The June Dot Plot pared that back to just one rate cut this year. The latest consensus projection now calls for two more 25-basis-point-cuts this year followed by four more quarter-point cuts next year, then two more quarter-point cuts into 2026. Also, the Fed’s summary of Economic Projections (SEP) sees core inflations peaking at 2.6% this year before cooling to 2.2% in 2025 and 2.0% in 2026. The Fed slightly lowered its previous forecast for U.S. economic growth, with the economy expected to grow at an annual pace of 2.0% this year and remain at that level through 2025 and 2026. Given the broadly healthy economic conditions for a soft landing, investors have front-run anticipated rate cuts all year long, which has pushed the S&P up 18% so far in 2024. As expected, this heavy buying pressure has driven the S&P 500’s valuation materially higher. One would question whether these valuations will continue to go higher. Based on the past rate-cutting cycles, we feel that the stock market valuations will continue to go higher. How much higher? And how does that compare with the valuations at the beginning of prior rate-cutting cycles? To contextualize where we are today, let’s begin with prior valuations. The highest S&P 500 valuations at the beginning of rate-cutting cycles over the last 40 years came in 1998, 2001 and 2019. Their average price-to-earnings ratio was 23.6 and their average price-to-sales ratio of 3.0. Specifically, today’s price to earnings ratio is 25% more expensive than the average of the prior three most expensive starting rate cut valuations, and 50% more expensive on a price-to-sales basis. This does not mean stocks cannot or will not soar from here, but it does suggest we should recognize the implications for longer term returns. That forecast may end up being overly pessimistic given the potential for a further structural shift higher in valuations as in prior decades, but it does suggest that another decade of double-digit annualized returns, which investors have enjoyed over the past 10 years, is unlikely. However, we minimize any risk by investing in selective individual stocks that are undervalued, especially for retirement accounts. During the quarter, we added one new equity position, Park Hotel & Resorts (PK), which we previously owned. We also sold four additional equity positions and two REITS. Among the equity positions, we sold Alibaba Group Holding ltd (BABA), Kering SA (PPRUY), Kellogg (K), and B Riley Financial (RILY). In addition, we sold two real-estate investment trust positions Douglas Emmet, Inc. (DEI) and Tanger Factory Outlet (SKT). As far as the Fixed income area, we continued to buy short-term Treasury Bonds as the old ones matured. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% Cash for most of our portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, We are sending you this special investment update to evaluate the first half of 2024 and project into the second half of 2024. The end of the previous quarter marked the midpoint of the year. Let us get an overall perspective on what happened during the first half of the year, then shift our perspective to what we expect will happen during the second half of the year. The top headline is the Standard & Poor’s (S&P’s) monster 14.5% return, the best first half to an election year in almost 50 years, punctuated by 31 different record-high closes. Now, if you are not seeing a similar return in your portfolio, there is a good reason – a select few Tech / AI stocks are behind most of these gains. For example, Nvidia’s 149.5% surge was responsible for roughly 30% of the S&P’s climb. Throw in Microsoft, Apple, Google, and Amazon, and that group of five tech dominators accounts for 62% of the S&P’s gains. Meanwhile, the average stock in S&P, as illustrated through the S&P 500 Equal Weight Index, climbed just 4% in the first half. Over in the tech-heavy NASDAQ, the first half gains were even bigger – an 18% return. However, here too, there was a wide differential between the top stocks and “all the rest.” The Equal Weight NASDAQ 100 Index added less than 5%. Of the major three indexes, the Dow Jones brings up the rear, climbing less than 4% as big names such as Nike, Intel, and Boeing all collapsed more than 30% in the first half of the year. In the small-cap area, the underperformance continued as the iShares Russell 2000 ETF climbed barely to 1.5% after spending much of the first half of the year underwater. If we break down the market’s overall performance into quarters, we see a “tale of two markets.” During the first quarter, the market as a whole did very well. The percentage of the S&P stocks making 12-month highs topped out in March. But in the second quarter, the performance narrowed. The reason for the shift is because it was in late March/early April when Wall Street realized that the Fed was not going to have an avalanche of rate cuts that had been priced into the market. You will recall that the first three months of the year featured inflation data that came in “hotter than expected.” It was this March/April stretch when Wall Street finally begrudgingly concluded that the inflation data were not playing nice. As far as Treasuries were concerned, yields were volatile, but shifted higher overall. The 2-year Treasury yield climbed 50 basis points to 4.75% while the 10-year Treasury yield added 52 basis points to 4.40%. As to the Federal Reserve’s interest rate policy and the timing of the rate cuts, Wall Street came into the year with high hopes. In early January, the going expectation was for the six quarter points cuts this year. That prediction aged about as well as “transitory inflation.” The first half of 2024 saw AI continue winning. Using S&P measures for the US, momentum’s tear on the back of artificial intelligence is on a scale never seen before – its relative performances at least surpassed the high set during the dot-com bubble in 2000. But as we look ahead, increasing caution appears to be needed. Last week, reports leaked suggesting that the Biden administration is looking to improve even stricter controls on sales of semiconductors and related equipment to China. Meanwhile, former President Donald Trump sounded negative in his comments about Taiwan, the semiconductor manufacturing capital of the world. Investors net takeaway was that no matter who wins the White House in November, there will likely be increased scrutiny on the exchange of AI products and equipment between the U.S and Asia. Though we are optimistic about the second half of 2024, we maintain an undercurrent of caution. There are growing red flags and signs of weakness in both the economy and various corners of the market. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, The Standard and Poor 500 index is up over 14% year – to – date and hitting all-time highs. So, is it time to push more chips into this market? Or should we be taking profits off the table to sidestep the risk of a looming pullback? In order to answer this question, you need to look back to last summer. The U.S. Federal Reserve stopped raising rates after its most fast – and – furious rate – hike cycle in history. From March 2022 to July 2023, the Fed hiked by 525 basis points – all in just about 18 months. Since then, the stock market has been anxiously awaiting the central bank’s first rate cut. For the past several months, the U.S. Federal Reserve has consistently expressed its willingness to cut interest rates once it feels confident that inflation is on a sustainable trajectory back to 2%. U.S. inflation tracked sideways this quarter and consumer spending weakened, mixed signals for the Federal Reserve that provided little clarity on whether the U.S. central bank will be able to begin cutting interest rates in September. The data suggested the elevated pace of price increases could last longer than expected but also the prospect that more tepid consumer spending may keep a lid on price increases in the months ahead. The Commerce Department’s Bureau of Economic Analysis reported that the personal consumption expenditures (PCE) index increased 0.3% in April. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by 0.2% in April after a downwardly revised 0.7% rise in March. Revised gross domestic product data showed consumer spending moderating to a 2.0% pace in the 1 st quarter. The biggest headwind facing the global and investment markets in recent weeks has been the climbing 10 – year Treasury yield. It has been climbing steadily over the past several months. The 10 – Year Treasury Note was yielding approximately 3.75% last summer. The yield kept rising to over 4.7% in late April and has been volatile since then and currently has a yield of a little over 4.35%. The Fed presently does not feel any urgency to cut interest rates. But recent economic data suggests that they should get some urgency soon. A couple of weeks ago, we learned that jobless claims in the U.S. economy soared to a nine-month high. We also learned that consumer sentiment in the U.S. economy plunged to a six-month low and is currently in the midst of its biggest three month drop since summer 2022. That data adds to a long list of evidence that the U.S. economy is slowing rapidly right now. Last Thursday, we had the first of two scheduled Presidential debates. Unfortunately, it lived up to its expectations. Both candidates are deeply unpopular and nothing happened on Thursday that changed either candidate’s popularity. However, betting markets interpreted the debate as a huge “win” for Trump and a huge “loss” for Biden. Meanwhile, May’s Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation report, was released last Friday. It showed that PCE inflation fell from 2.7% to 2.6% in May, while the core PCE rate dropped even more from 2.8% to 2.6%. Core PCE inflation is now running at its lowest level since March 2021 and it is expected to fall further in June. During the quarter, we added some new equity positions such as Fortune Brands Innovations Inc. (FBIN), Kellanova (K), (formerly Kelloggs) and Bio – Rad Laboratories, Inc. (BIO). We also purchased CVS Health Corporation (CVS) after we sold our Walgreens (WBA) position. As far as the Fixed Income area, we continued to buy additional short-term Treasury Bonds as the old ones matured. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain substantial exposure to common stocks ( and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% Cash for most of our portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives. We want to wish you a happy and safe Independence Day Celebration this weekend.
Dear Clients and Friends, Stocks just wrapped up a solid first quarter with all the major stock indexes approaching new highs. Stocks have been up five consecutive months of solid gains, led by an especially strong rally in A.I. (Artificial Intelligence) stocks. Most of this rally is due to the Federal Reserve and their view of the economy and interest rates. Back in December, the Federal Reserve penciled in three interest rate cuts for 2024, which was a big deal. Throughout 2022 and 2023, the central bank embarked on the fastest rate – hiking path in our economy’s history. All those rate hikes were stifling both economic growth and the stock market. Investors were desperate for the hikes to end and, better yet, for the rate cuts to start. During its recent March meeting, the U.S. Federal Reserve updated its Summary of Economic Projections for the 1 st time since December and almost nothing changed. They also confirmed that three rate cuts are coming this year. Just as important, Fed Chair Jerome Powell’s language shifted in his press conference after the meeting from “we need to see inflation come down to 2% before we cut rates” to “we’re pretty confident that inflation is going to come down to 2% and so we’re pretty confident that we’re going to be cutting rates multiple times this year”. He seemed entirely unphased by the recent relative “stickiness” in inflation. But since then, inflation has consistently surprised us to the upside and the overall U.S. inflation rate has stopped falling. Instead, it has stabilized right around 3%, which is above the Fed’s 2% target. Consequently, investors were worried that because inflation is flat lining above that target, the Fed would walk back the rate cuts. During their recent March meeting, they confirmed that three rate cuts are coming this year. Going back to 1950, the “average” inflation rate in the U.S. economy is 3.5%. we are below that right now. Therefore, even though inflation is stabilizing above the Fed’s target, it is more importantly stabilizing below the long-term average inflation level. This should not worry the Fed and should proceed with the rate cuts this year. This should be super bullish for stocks. For all of 2023, the economy grew a healthy 2.5%, defying predictions that the Federal Reserve’s aggressive increase in interest rates to fight inflation would tip the nation into a recession. However, economists said a pullback is likely in 2024 as high interest rates and inflation take a bigger toll on growth and a burst of post pandemic consumption runs dry. As a result, some experts believe that a mild recession will finally happen this year as layoffs spread beyond household names that already have cut jobs recently, such as Google, Amazon, and Wayfair. Broadly, however, the outlook for 2024 has recently brightened. Inflation has eased more swiftly than anticipated, even as consumer spending has stayed resilient. The inflation slowdown has led the Federal Reserve to signal it is likely done hiking its key interest rate after raising it to a 22- year high of 5.25% to 5.5%. During the quarter, we added to some of our existing holdings and sold off most of our underperforming holdings. We added one new equity position, Kering (PPRUY). However, it pays a dividend above 3%, which should currently be classified as a fixed income position. We also purchased additional U.S. Treasuries (6to 9 months) to replace the ones that expired on December 31, 2023. We plan to purchase additional U.S. Treasuries. We sold off many underperforming small holdings, such as Appharvest, Inc. rights (APPHW), as well as XOS Inc. rights (XOSWW). We also sold small positions in Danimer Scientific, Inc. (DNMR), Liberty Broadband Co. (LBRDK), Lucid Group, Inc. (LCID), Lumen Technologies, Inc. (LUMN), Opendoor Technologies (OPEN), Nio Inc. (NIO), Walgreens Boots (WBA), Lanxess Ag (LNXSF). In addition, we sold one-half of our position in Oscar Health, Inc. (OSCR) in all of our portfolios after it more than doubled. We also sold our entire position in Fairfax Financial Holdings (FRFHF) after a considerable gain. Selling Fairfax Financial Holdings was a very tough decision for us because we feel there is still more value in this position. We continued to put most of the cash proceeds from the sales right into the Schwab Value Advantage Money Market Fund (SWVXX), which currently pays in excess of 5%. The Schwab Value Advantage Money Fund (SWVXX) is a fund that we use for investing excess cash or for specific restrictions as set forth by the client. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% Cash for most of our portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, The 4 th quarter ended on a positive note with all the major stock indexes up for the quarter and year. A strong market rally has been in force since the end of October with the major indexes on a nine-week win streak. The Standard & Poor 500 Index closed just below its all-time high. After rising and then moving sideways in recent months, inflation emphatically resumed its decent in October. Since reaching a 40-year high of 9.1% in June 2022, inflation has come down substantially. The Federal Reserve is winning its fight over inflation, boosting Americans’ spirits and offering greater reassurance that the U.S. economy can avoid a recession while bringing prices under control. The Commerce Department recently reported that the Fed’s preferred inflation measure, the personal consumption index, fell 0.1% in November from the previous month, the first decline since April 2020. Prices were up 2.6% on the year, not far from the Fed’s 2% target. Core prices, which exclude volatile food and energy costs, rose just 1.9% on a six-month annualized basis, suggesting the Fed is well on its way to reaching that target. Consumers, after dealing with crushing price increases and recession fears over the past two years, are adopting a sunnier outlook. A measure of consumer sentiment from the University of Michigan released recently rose 14% to a five-month high in December from the previous month as households brought down their expectations for inflation in 2024. These developments at least raise the prospect of some longer-lasting relief for Americans who have struggled to keep pace with rapidly rising prices triggered by pandemic-related supply chain troubles and consumer demand surges for more than two years. The Federal Reserve’s December meeting brought us a “Gift from Santa Powell”. The Federal Reserve not only held rates steady for a third straight time (as expected), but also surprised investors with an indication of three rate cuts in 2024 (.25% each). In addition, the Fed’s “dot plot” (committee member expectations) also suggested an additional four cuts in 2025 ( a full percentage point). The stock and bond market’s reaction helped the Dow Jones Industrial Average (DOW) surpass 37,000 for the first time ever. Chairman Powell discussed some of the developments which may have led to their decisions: · Healthy jobs growth · Lower inflation rate · Higher economic growth Overall, a strong labor market supports economic growth while lower inflation supports the idea of lower interest rates in the future. In terms of the markets, a stable – to – lower interest rate environment is supportive for both stocks and bonds. As always, Farmand Investment Services recommends staying balanced, diversified and invested. Despite short term market pullbacks, it is more important to stay focused on the long – term (3-5 years), improving the chances for clients to reach their goals. During the quarter, we continued to take advantage of the stock market’s strength by trimming some over weighted positions and selling some entire positions. We sold our entire position in General Electric (GE), Walt Disney Holdings (DIS), and Park Hotels and Resort (PK). We put the cash proceeds from the sales right into the Schwab Value Advantage Money Fund (SWVXX), which currently pays over 5.00%. The Schwab Value Advantage Money Fund (SWVXX) is a fund that we use for investing excess cash or for specific restrictions. We also sold some of our municipal bond funds (BLE, NVG & NZF) for a tax loss and purchased another municipal bond fund, First Trust Managed Municipal ETF (FMB) to avoid the “wash sale” rule. As far as purchases were concerned, we added one new equity position, Oscar Health, Inc. (OSCR), which operates as a health insurance company in the United States. The company offers Individual and Small Group and Medicare Advantage plans, as well as +Oscar, a technology driven platform designed to help providers and payors directly enable their shift to value-based care. It also provides re-insurance products. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, For the quarter, the S&P 500 fell about 3.6%, the Dow fell 3.5%, and the Nasdaq shed 4.1%. In September alone, the S&P 500 dropped 4.9%, the Dow fell 3.5%, and the Nasdaq declined 5.8%. The third quarter ended with the S&P 500 and Nasdaq posting their biggest monthly percentage drops of the year, while all three major indexes had their first quarterly declines in 2023. Data showed the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 3.9% on an annual basis for August, the first time in over two years it had fallen below 4.0%. The Federal Reserve tracks the PCE price indexes for its 2% inflation target. The data revealed a “better than expected but still elevated inflation picture”, said Eric Freedman, chief investment officer at U.S. Bank Asset Management. During their September meeting, the Federal Reserve, again, did what all of Wall Street had anticipated and “paused” on raising key interest rates. However, the Federal Open Market Committee (FOMC) statement was very hawkish, leaving the possibility of one more future increase in key interest rates. According to the Federal Reserve, this will be based on future economic data and determined on a meeting-by-meeting basis. However, even though inflation is on a downward trend, it did spike up during the quarter. Powell’s view also changed by saying that interest rates could stay higher for a lot longer than anticipated. Powell’s baseline case is no longer for a “soft landing”, which means recession. Obviously, the markets did not like the large change in expectations and all of the major indexes fell. In addition, the threat of a federal government shutdown suddenly lifted late Saturday night as President Joe Biden signed a temporary funding bill to keep agencies open with little time to spare after Congress rushed to approve the bipartisan deal. The bill funds the government until November 17. The U.S. economy continues to show resilience in the face of steadily higher interest rates resulting from the Federal Reserve’s 18-month long fight to bring down inflation. Estimates from the Commerce Department indicate that the gross domestic product – the economy’s total output of goods and services, is picking up in its growth rate. Driving this growth was a burst of business investment. Companies plowed more money into factories and equipment. Increased spending by state and local governments also helped fund the economy’s expansion. Consumer spending, the heart of the nations economy, continues to be solid. Investment in housing, though fell, weakened by the weight of higher mortgage rates. The bottom line is that U.S. economy is still growing above trend, and the Fed will be wondering if they need to do more to slow the economy. During the quarter, we took advantage of the stock market’s strength by trimming some overweighted positions and selling some entire positions. We sold our entire positions in Sofi Technologies (SOFI), Vimeo, Inc (VMEO), Quantumscape (QS), and Alphabet Inc (GOOG). After successfully owning Alphabet from 2015 to 2020, we purchased the company again in 2022 as tech stocks broadly faced weakness. We put the cash proceeds from the sales right into the Schwab Value Advantage Money Fund (SWVXX), which currently pays over 5.00%. The Schwab Value Advantage Money Fund (SWVXX) is a fund that we use for investing excess cash or for specific restrictions. As far as purchases were concerned, we added one new position, Fidelity National Information Services, Inc. (FIS), which is a provider of technology solutions for financial institutions and businesses of all sizes. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, We hope that everyone enjoyed their celebration of the Fourth of July. For us, the Fourth of July is a celebration of everything that America stands for – independence, freedom, liberties, and most of all families. The quarter ended on a positive note with all the major indexes advancing nicely for the quarter and mid-year. During their June meeting, the Federal Reserve, again, did what all of Wall Street had anticipated and “paused” on raising key interest rates. However, the Federal Open Market Committee (FOMC) statement was very hawkish leaving the possibility of two future increases in key interest rates. According to the Federal Reserve, this will be based on future economic data and determined on a meeting-by-meeting basis. Long story short, inflation is on a downward trend, the labor market is cracking, and financial stress measures are spiking – a potent combination which will inevitably force the Fed to end its rate-like campaign. The global economy has managed to avoid a recession at mid-year, thanks to resilient consumers, a surge in travel and leisure activities, and the reopening of China’s economy following pandemic-related lockdowns. That is likely to change in the second half of the year as the impact of high interest rates, inflation and a banking sector crisis combine to possibly tip the world into a mild recession. Many economic indicators are pointing to a recession in the United States, not the least of which is an inverted yield curve. That happens when yields on short-term U.S. Treasury bonds are higher than long-term bonds, indicating that investors expect tough economic times ahead. It may not feel like it at the grocery store, but inflation is on a downward trajectory in the U.S., Europe and across many other markets. That is largely due to lower energy prices, fewer supply chain disruptions and aggressive interest rate hikes by central banks. Interest- rate sensitive industries, such as housing, are already feeling the effects, with home prices falling in some formerly hot markets. Rate hikes meant to fight inflation has also triggered a crisis in the banking sector. A sharp selloff in the bond market last year hammered the portfolios of numerous regional banks. The next shoe to drop could be commercial real estate. Office vacancy rates are on the rise as more companies embrace work-from-home business models. Given these mounting risks, the interest rate outlook has changed dramatically since early March, when the banking crisis first hit. Investors no longer feel that the U.S. Federal Reserve will raise rates as far or as fast as previously expected, largely due to a tighter lending environment stemming from the banking turmoil. Most everyone knew there would be consequences to one of the most aggressive tightening campaigns in history. The dislocations we are seeing in the financial markets signal a painful new phase for the Fed. It has clearly exposed some vulnerabilities and as a result, we feel we are nearing the end of this rate-hiking cycle. In the meantime, the economy is showing surprising resilience in the face of higher interest rates. The U.S. economy grew at a 2% annual pace from January through March as consumers spent at the fastest pace in nearly two years. The economy has been slowed by the Federal Reserve’s aggressive drive to tame inflation through a series of interest rate hikes beginning early last year. The Fed has raised its benchmark interest rate ten times since March 2022 in its attack on inflation, which hit a four-decade high of 9.1% last year but has since slowed to 4%. In the current April-June quarter, the economy is believed to be slowing further but still managing to maintain its growth. Therefore, over the next few months, we feel that we will continue to get falling inflation with a dovish shift in Fed policy and rising earnings. During the quarter, we took advantage of the stock market’s strength by trimming some overweighted positions and selling some entire positions. Our biggest trimming came from the partial sale of Nvidia. We sold one-half of the Nvidia position in each of our portfolios for a nice gain. We sold our entire positions in GE Healthcare (GEHC), which was spun off from General Electric (GE), which we still own. We believe the remaining company is still undervalued, while CEO Larry Culp has reduced leverage, cut costs, streamlined operations and improved overall morale. In the first quarter of 2024, GE will separate aviation and power, which we believe will highlight the underlying values of each as the strong, defensive growth businesses they are. We also sold all three of our positions in the Inflation Protected Bond-The iShares TIPS Bond ETF (TIP), the SPDR Portfolio TIPS ETF (SPIP) and the iShares 0–5-year TIPS Bond ETF (STIP). In addition, Cowen, Inc. 7.75% Preferred stock (COWN) was “called” in at $25.00 a share, which caused the liquidation of our entire position. We put the cash proceeds from the sales right into the Schwab Value Advantage Money Fund (SWVXX), which currently pays around 5.00%. The Schwab Value Advantage Money Fund (SWVXX) is a fund that we use for investing excess cash or for specific restrictions. It can be easily liquidated within one day. However, it is important to note that this fund is not a permanent place to invest your funds. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
Dear Clients and Friends, After a red-hot start to the year, the stock market has stalled out in February and March and now some investors are questioning whether we are going back into a bear market. The S&P 500 rose 6.2% in January, one of its best January performances ever. In fact, since 1950, the S&P 500 has risen 6% or more in January in just ten separate years. The results are even better when stocks popped in January after having a bad showing in the previous year, which is exactly the situation we have in 2023. That has happened four times since 1950. Each time stocks rose by more than 20% through the entire year. Barring a black swan event, history says it has a very good chance of being the start of a big stock market breakout that lasts for at least the rest of this year. During the last few weeks, three important pieces of economic data were released. We are talking about February’s Consumer Price Index (CPI), the Producer Price Index (PPI) and February retail sales. The CPI was up 0.4% in February and is now reviving at a 6% annual pace. That is down from 6.4% in January and is the smallest increase since September 2021. The PPI fell 0.1% in February, below the estimate for a 0.3% increase. Year-over-year prices rose 4.6%, which is down substantially from 5.7% in January. Then the Commerce Department reported that retail sales fell 0.4% in February, which was in line with expectations. During their March meeting, the Federal Reserve did what all of Wall Street had anticipated and raised key interest rates by twenty-five basis points. However, the big news was the Federal Open Market Committee (FOMC) statement. The previous FOMC statements typically had the phrase “we are going to have ongoing rate increases.” However, this phrase was missing from the March FOMC statement. In addition, the Federal Reserve has not ever discussed “tightening credit conditions” during this rate-hike cycle. Yet, Powell mentioned it about a dozen times in the post-meeting press conference. He kept saying repeatedly that because of the bank failures, credit conditions are tightening. He wanted to emphasize to everyone that bank lending standards are tightening. Tighter credit conditions mean it is harder to get access to capital. The harder it is to get access to capital, the less capital consumers and businesses have at their disposal. The less capital they have at their disposal, the less they spend. The less they spend, the lower inflation goes. Inflation and falling stock prices were the prevailing themes of 2022, but in 2023, disinflation and rising stock prices are the prevailing themes. Also, leading indicators of labor market strength have weakened over the past two months, implying that the stubbornly hot labor market is finally cooling. In addition, while the banking crisis appears to be contained for now, it has put banks on edge. Historically speaking, whenever financial stress measures spike to levels like this, the Federal Reserve typically supports financial markets with either a rate pause or rate cuts. Stocks tend to follow that action with big rallies. Given falling inflation trends, deteriorating labor market conditions and spiking financial stress measures, it appears very likely that the Federal Reserve will pause its rate-hike campaign very soon. We are hopeful that a Fed pause in May or June will spark a big stock market rally that will spill into a new bull market. To understand our investment strategy, we need to first understand the behavior patterns of stocks. In the short-term, stocks are driven by several factors such as geopolitics, interest rates, elections, recession fears and so on and so forth. In long term, however, stocks are driven by one thing, fundamentals. That is, at the end of the day, revenues and earnings drive stock prices. If a company’s revenues and earnings trend upward over time, then the company’s stock price will follow suit and rise. Conversely, if a company’s revenues and earnings trend downward over time then the company’s stock price will drop. Therefore, the historical correlation between earnings and stock prices is about as perfectly correlated as anything gets in the real world. At the end of the day, earnings drive stock prices. During the quarter, we took advantage of the market volatility by reducing our Equity portion of our portfolios and increasing our Fixed Income portion of our portfolios. We sold some overweighted equity positions and invested the proceeds by adding more U. S. Treasury Notes and Bills that have one-year maturities. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
