Quarterly Investment Update – 1st Quarter 2011
farm-admin • April 4, 2011
QUARTERLY INVESTMENT UPDATE
1 st
QUARTER 2011
April 4, 2011
Dear Friends and Clients,
There were several political developments on the global front during the quarter ended March 31, 2011. The wild cards continue to be the ongoing developments in both Japan and Libya, as well as the Euro debt crisis, where there could be further repercussions from Portugal’s rejection of the austerity plan. All of these developments contributed to the blue chip market indexes hitting bottom on March 16 th for this recent correction. Even though we did not get a clear resolution of either the nuclear crisis in Japan or the turmoil in Libya, investors did not seem to care. Since the March 16 bottom, the Dow surged over 700 points. For the quarter, the Standard & Poor 500 index closed at 1325.83, up 5.42 %.
Actually, it’s quite a rocket ride we have been on-ever since the stock market bottomed two years ago, but especially since the sharp midcourse “correction” ended last summer. From the major low on March 9, 2009, the benchmark Standard & Poor’s 500 index has nearly doubled, the biggest gain in such a compressed time frame since 1933. Just since the July 2010 bottom, the index was up a stunning 31% before Wall Street’s long-delayed “correction” finally arrived in March along with the shock from Japan. By now, the human dimensions of the Japanese tragedy are becoming horrifyingly clear, yet the long-term economic impact of the earthquake, tsunami and now, radiation released from nuclear power plants, is still unclear and may remain uncertain for a while. Before discussing the financial aspects, one can’t help reflecting, a moment, on the humanitarian dimension of the tragedy. Here, in one of the world’s most advanced economies – despite the best of preparations, the best of warning systems and the best of rescue efforts – we are witnessing a natural disaster that has taken thousands of lives.
Will Japan’s earthquake/tsunami drag the global economy into recession and sabotage the worldwide bull-market for stocks? Despite the emotionally wrenching footage of wrecked towers, crippled power plants and homeless people, the overwhelming odds say “no”. Within a few months, perhaps before spring is out, most analysts expect the U.S. stock market and many overseas bourses (excluding Tokyo) to be touching new 2011 highs.
However, as we previously discussed, our own two-year bull market on the NYSE was showing signs of age even before the news from Japan broke out. During the past quarter, statistics reflect that fewer stocks are participating on the upside, valuations of U.S. corporations are trading at a higher premium to the replacement value of their assets, and lastly, insiders and other knowledgeable investors are bailing out of their company’s stock. Stocks were already acting wobbly before the Japanese earthquake struck. When Mother Nature spoke, though, investors had no choice but to listen.
As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to continue to maintain a substantial exposure to common stocks (and mutual funds) as long as there is a reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in the fixed income portion of our portfolios.
As far as the equity portion of our portfolios is concerned, during the quarter, we added to our allocation of water utilities by purchasing American States Water (AWR), with a current yield of 3.1%. We also added to the emerging markets sector by purchasing some foreign telecos that offer generous dividends with great potential such as Cellcom Israel (CEL) and Telekom Indonesia (TLK). We also added to our positions in Western Asset Emerging Markets (ESD) as well as the Power Shares India Portfolio (PIN). In addition, we added to our allocation of homebuilding by purchasing Vulcan Materials Company (VMC).
As far as the fixed side of our portfolios, the price of a typical long-dated Treasury bond jumped six points from mid-February to mid-March, which dropped its yield to its lowest level since early December. Meanwhile, our Build America bonds have done even better, with the share price of Power Shares Build America Bond Portfolio (BAB) recently touching a four-month high.
In addition, we continue to add to the Vanguard Intermediate Investment Grade Fund (VFICX), with a current yield of 3.5%, which is pretty generous for a fund with an average maturity of 6.7 years and an average credit quality of A1. We also added to our position in the DoubleLine Total Return Bond (DLTNX). Both of these bond funds present a good opportunity to help balance our portfolio allocation, especially since corporate bonds have recently lagged the Treasury rally. Furthermore, for selected taxable accounts, we continue to add to the Nuveen Quality Income Municipal Fund (NQU) and the Vanguard Intermediate-Term Tax Exempt Fund (VWITX), with current yields of approximately 7.0% and 3.70% respectively.
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 me should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandcpa.com for a quick Retirement Calculator, our latest firm news, and Market Commentary archives.
Dear Clients and Friends, The first quarter of 2026 generated much volatility and ended the rally of the bull market. The volatility was due to a radical change in the market sentiment, because of the issue of spiking oil prices. The market has gone from having the benefits of lower taxes, big incentives for capital spending, moderating inflation, lower interest rates, and economy that is broadening and sustainable. Now the sentiment has moved to higher inflation, potentially higher interest rates and an economy on the brink. The reason for this surge in oil is geopolitical. Escalating conflict involving Iran has created fears that energy infrastructure and tanker routes in the Middle East could be disrupted. Markets are suddenly pricing in the risk that shipping through the Strait of Hormuz could be severely restricted or halted. This route carries roughly 20% of the global oil supply. When investors believe the world’s most important oil corridor might close, crude oil prices don’t rise slowly, they spike! That spike is exactly what we are seeing now. Crossing $100 per barrel is not just a technical milestone, it is a psychological one. Oil above $100 historically signals that something unusual is in the global economy. The last time crude oil spent meaningful time above that level was during the energy crisis that followed Russia’s invasion of Ukraine in 2022. Before that, you have to go back to the commodity supercycle of the late 2000’s. The reason is simple: Oil above $100 starts to break things. It increases costs for airlines, trucking companies, shipping firms, chemical producers, and manufacturing supply chains. Eventually, it works its way into inflation numbers. That’s why equity markets often react negatively when oil spikes suddenly. When oil jumps this fast, the market immediately is asking the question - Is this a temporary shock or the start of an energy crisis? We are hopeful that this will be a temporary shock. The issue, in our opinion, was partly due to Iran but it was mostly due to a hot Producer Price inflation report, followed by a bizarre Federal Reserve meeting, removing the odds of rate cuts but more importantly Powell stating he is not leaving in May, due to the investigation. We do not like this type of friction at our Central Bank. During the quarter, we added several new positions, and some were owned before. We added Kraft Heinz Company (KHC), and Disney, which are positions that we owned in the past. We also added new positions in Pool Corp. (POOL), FactSet Research Systems (FDS) and Once Upon a Farm (OFRM). As far as sales for the quarter are concerned, we sold two positions with a nice rate of return. We sold Millicom Int’l Cell (TIGO) and Sixth Street Specialty Lending (TSLX). 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 invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
For months, the headlines have been trying to take this market down. First it was surging bond yields and “higher for longer” interest rates. Toss in weak earnings from some of the big names, geopolitical flare-ups, and talk of a looming recession. Then came the fears around AI froth – overstretched valuations, overbought tech stocks, traders too euphoric. If you followed the mainstream media, you would expect this market to be on its knees. But every time we have seen a pullback this past year – whether it has been a 3% four-day slide, or April’s “Tariff Tantrum” 20% correction – this market has come roaring back to set new highs. The market is sending a message – and it is not subtle. The foundation is stronger than the headlines want us to believe. All of this happened before the Federal Reserve made one of its most important announcements in years. On October 29, the Fed confirmed that Quantitative tightening has ended. As of December 12, the Fed stopped shrinking its balance sheet. They began reinvesting maturing Treasuries and mortgage-backed securities, reversing the slow liquidity (i.e. cash) drain that has been weighing on the system since 2022. That means billions of dollars will start flowing back into U.S. stocks as the Fed shifts from draining money out of the system to putting it back in. More liquidity typically gives investors more confidence – and that can lift stock prices across the board. While many global economies continue to struggle, the U.S. is showing renewed signs of strength – and the outlook for 2026 is getting clearer. Recent data shows U.S. Gross Domestic Product (GDP) is expanding at a 3.9% annual pace, with some forecasts expecting growth to accelerate next year. Rate cuts appear energy prices are softening, and the onshoring of data centers, semiconductors, pharmaceutical and automotive industries are poised to fuel continued momentum. Meanwhile, inflation pressures are easing, with deflationary trends in places like China and Europe helping to keep domestic prices in check. All of this paints a very different picture than we have seen in recent years and we look forward to 2026. During the quarter, we added a couple of names that we owned before – Pfizer, Inc. (PFE) and Rayonier, Inc. (RYN). We also added one new name, Camden Property Trust (CPT), a real estate company primarily engaged in the ownership, management, development, acquisition and construction of multifamily apartment communities. As far as sales for the quarter are concerned, we sold Oscar Health (OSCR), Westrock Coffee Co. (WEST), Solstice Advanced Materials (SOLS), Compass Diversified (CODI) and Amazon (AMZN). 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.
Approximately two weeks ago, the U.S. Federal Reserve just did exactly what Wall Street expected in the short term: cut interest rates by 25 basis points and projected two more cuts by year’s end. At first glance, a rate cut should have fueled a rally – but the Fed’s forward guidance flipped the mood. Markets had been pricing in two or three rate cuts in 2026 – but the central bank only penciled in one. It also revised 2026 GDP expectations higher, called for steady unemployment levels, and nudged inflation estimates upward. In other words, the Fed is saying that the economy remains strong, and inflation is not fully vanquished and therefore, it will not commit to an aggressive cutting cycle just yet. Federal Reserve Board Chair Powell reinforced this message in the post – meeting press conference, calling this a “risk-management cut”: a signal that the Fed is not racing into an easing cycle but keeping optionality open. That spooked traders into thinking this is not the start of a sustained easing campaign. And stocks, which had rallied hard into the meeting, promptly sold off in classic buy-the-rumor, sell-the-news baseline. But here is the thing: none of what Powell said was bearish. The Fed did not slam the door shut on more cuts. It simply refused to pre-commit. That is central banking done right: going one meeting at a time, driven by data, not promises. Last week, the Federal Reserve’s favorite inflation barometer, the Personal Consumption Expenditures (PCE) Price index showed that inflation remains a challenge, even though there was no major curveballs. Headline PCE rose by 0.3 month-over-month, lifting the year-over-year figure to 2.7%. Importantly, all of these numbers matched the Dow Jones consensus forecast. We feel that the data is trending in a direction that supports further easing. Inflation is steady – not exploding. Labor markets are softening around the edges. And growth, while solid, is not running away. Altogether, the case for further cuts remains intact, that is plenty of juice to sustain a strong market rally into 2026. During the third quarter, we added one new name to our portfolios, Albertsons Company shares Class A (ACI). We also added to other positions, including Stanley Black & Decker (SWK). As far as sales were concerned, we sold Affiliated Managers (AMG) for a nice profit. We also sold Angi Inc. (ANGI), Anywhere Real Estate (HOUS), Prosus NV (PROSY). We also sold the remaining shares in Atlas Corp. Pfd (ATCO-H), which were earlier called in for “redemption”. 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, The second quarter ended on a positive note with all the major stock indexes rising to all-time highs, despite the uncertainties due to tariffs, the Israel – Iran conflict, the Russia – Ukraine war as well as other issues that may have an effect on our economy. Stocks made a swift and historic comeback from the market’s April bottom, with the Standard and Poor 500 closing at a record high. Now, as the first half of 2025 draws to a close, overarching risks are all but removed. From tariff-driven inflation pressures to conflicting economic signals and murky data, what lies ahead is anything but straightforward. According to EY chief economist Greg Daco, “we are going to see an inflation reacceleration that will be tariff-induced. There’s more pressure to come into the economy and that will lead to income erosion and a consumer spending slowdown. That is really the picture that we should expect in the second half of this year”. The latest reading of the Federal Reserve’s preferred inflation gauge reflected some of those concerns, with price increases accelerating in May as inflation remains above the Fed’s 2% target amid underlying signs of slowing economic growth. Those economic concerns, however, have yet to weigh heavily on investors. Markets have powered higher, led by strength in Tech and Financials, as consumer sentiment rebounds and traders digest growing clarity around trade policy. As far as interest rates are concerned, we have had several Federal reserve Governors come out and talk about cutting interest rates. It seems likely that we will get a cut in September and a small chance of a cut in July. This would be bullish for both stocks and bonds if the market feels that the Federal Reserve believes inflation is not an issue. As these uncertainties get resolved, we feel that there is more upside in the markets for the rest of the year. During the past year, we were holding high cash levels than normal. Most of that cash was invested in one-year U.S. treasury Bonds that matured May 31, 2025 and June 30, 2025 respectively. We have been investing most of the cash proceeds in Fidelity Corporate Bonds ETF (FCOR), which pays out a dividend of 4.5%. The remainder of the cash was invested in the Schwab Value Advantage (SWVXX) fund with a similar yield. During the quarter, we purchased back HF Sinclair Corp (DINO) into most of our portfolios. We also purchased a small position in Pool Corp. (POOL). As far as sales for the quarter, we sold Dominion Resources (D) and Easterly Government Properties (DEA). 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. Lastly, we hope you have a safe and happy Independence Day weekend!
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.
