We hope that you had a pleasant summer and are looking forward to the joys that come with the changing of seasons.
At the beginning of September, Ratio welcomed Jen Padgett to our troop. Jen is our new Client Service Manager and will be helping to make sure any activity related to your accounts is handled efficiently and effectively. Jen brings helpful experience in this area and she is a great addition to our team.
Market movements over the last three months, and particularly in August and September, reflect many of the elements we highlighted in our last communication.
Specifically, we indicated our belief that the following qualifiers would be central to market direction through the remainder of the year.
• A recession is probably coming but more of the “mild” version.
• Inflation has been slowing but is still above the Fed’s 2% target.
• The Federal Reserve rate increases have had the desired effect, but they may feel the need to raise again to ensure inflation is stamped out.
None of these issues were resolved in the quarter. Market performance reflected the cloudiness as the Russell 3000 index, which represents ~96% of the investable US equity market was down 3.25%. The MSCI All World Index (Includes US Equities) was down 3.40%
We are focused on the following in the next twelve months:
• Fed officials seem to be signaling another increase this year with consensus now expecting declines somewhere in the back half of 2024 and into 2025.
• As investors find attractive yields in fixed income, expensive equities with higher risk profiles have underperformed.
• Higher rates also increase costs for many companies, contributing to skepticism about next year’s earnings projections.
Money market yields are currently above 5.00%, and the “higher for longer” narrative may support this level for the intermediate term. As investors start to look to 2024 and the potential for lower rates, we expect these yields will start to drop. In anticipation of this trend, we are beginning to explore fixed-income options with longer duration. The goal is to take advantage, within our fixed income allocations, of the highest bond yields since 2007. Yes, 2007!
While in the early part of the year optimism led to some frothiness in a few market segments, the present fundamentals do justify defensive posturing. This is not a bearish call for the markets, rather recognizing the economic cycle is still working through challenges before a new growth phase can emerge.
While the global economy has surprised some market observers with its resilience, many feel that growth expectations for the next twelve months leave little room for error and earnings estimates are yet to account for present pressures. At the same time, multiples for growth stocks remain high relative to historical averages, particularly for the “Magnificent Seven” (NVDA, META, AMZN, MSFT, AAPL, GOOGL, and TSLA). We may have seen the beginning of a reversal of the uptrend in these stocks in September, relative to the broader market performance. Whether or not this trend continues, we still have conviction in tilting our allocations with balance in mind. Our focus remains on larger companies that have strong balance sheets and are priced reasonably relative to growth expectations. Strategic additions are being made in small-sized companies, mid-sized companies, and targeted international markets that we feel are in oversold territory.
Cautious optimism means not succumbing to short-term gyrations based on headlines. Rather, we are focused on the opportunities presented by fundamental factors relative to prices being paid for discounted dividends and future growth.
Modifications to our equity positions this quarter were a small increase in our small and mid-cap allocation where price dislocation was occurring. Additionally, we shifted some of our international exposure to Latin America and away from Asia. We believe Latin American equities have attractive valuations and are well positioned to take advantage of continued “near shoring” trends from US businesses.
One of the financial blogs I follow recently re-posted some of the author’s beliefs about successful investing. *As I reflect on the last three months of market gyrations, I found the longer-term focused advice to be a good reminder. Here are a few key principles.
1. The timing of buy or sell decisions matters less than your holding period.
2. Self-control can make you far more money than just about any other trait as an investor.
3. Being bullish or bearish matters less than progress towards your goals.
4. A good strategy you can stick with is vastly superior to a great one you can’t stick with.
5. It is basically impossible to forecast the economy.
6. It is much easier to explain what just happened than predict what will happen next.
7. Markets are right most of the time but not all the time.
8. A long-time horizon is the ultimate equalizer in the markets.
9. Long-term returns are the only ones that matter but you have to survive the short-term.
10. It is OK to build wealth slowly.
We started Ratio Wealth Group with a belief that the above guideposts really are the best way to compound wealth and set the stage for thoughtful planning and deliberate distribution of assets. We spend our days sorting out the noise of the economy and markets, but maintaining a risk-aware, diversified allocation really is the winning recipe. As we approach year-end, we look forward to reviewing retirement plans, savings strategies, estate updates and other personal and/or family goals.
These reviews are key for us at Ratio because it allows us to stay focused on the true objectives for each of you as we overlay the important planning analysis. With 2023 winding down, we look forward to revisiting and updating your specific planning objectives.