Category: Articles

First Quarter 2023 Client Commentary

Greetings from Huston-Fox Financial Advisory Services.  While we are still progressing towards the end of a bear market, the first quarter 2023 was positive for stocks and bonds.  The Dow, large value stocks, mid-cap and small-cap stocks were all up between 1-2%.  Technology stocks were higher by 10% after falling 30% last year.  The S&P 500 was higher by 7%, almost entirely due to a handful of technology stocks rebounding.  Bonds also enjoyed a positive quarter after a negative 2022.  Markets remain lower over the past 12 months with technology stocks down 13% and the S&P 500 is down 10%.  Reinvesting dividends, periodic rebalancing, and higher bond yields all have helped portfolios during this timeframe.

Volatility has continued this year.  January was higher for stocks, February lower, and March mixed. As we enter the 15^th month of a bear/down market, these patterns are typical as markets attempt to digest large amounts of information.  Inflation remains front and center for the economy.  The Fed may soon end the current rate hiking cycle. Fixed income markets (bonds, CDs, etc.) are showing that rates may be reduced later this year or early next year once inflation falls closer towards the Fed’s targeted rate.

Ed Yardeni, President of Yardeni Research, states “the recent banking crisis is going to be very well contained by the Fed and FDIC. And I think this is going to keep the Fed from raising rates much further.”  Yardeni projects that the Fed will pause soon, and US stocks could rally 14% by end of year.

Banks came under pressure in March as Silicon Valley Bank (SVB) closed suddenly.  We’ve talked about duration risk in bonds consistently as a risk we will not take on, however, SVB took on extremely long duration bonds and when depositors withdrew funds, the bank collapsed.  It is important to keep bank deposits within FDIC coverage.  SVB will go down as a historically mismanaged bank.  One result of the SVB fallout is banks have started to lend more carefully (sometimes called a credit crunch).  Less lending will have a positive impact on reducing inflation and may help the Federal Reserve in the inflation fight.  The Federal Reserve is starting to see data suggesting the labor market is softening.  These items are important pieces to the inflation equation.

Sean and I continue to evaluate the ever-changing economic landscape while monitoring Fed actions, inflation data, oil and other geo-political issues, and recessionary data.  These factors and other issues are important to our work for you.  The debt ceiling battle in DC will continue to heat up as we enter the warmer months ahead.  We’ve been reading analysis on the debt ceiling from many sources, including the legislative analysis teams at Schwab and Columbia Threadneedle.  There is a growing consensus that political brinksmanship will result in a last-minute resolution.  Mixed in with a budding emergence of Presidential contenders, expect loud headlines.

We continue to adjust portfolios to reduce risks and take advantage of markets, including interest rate changes.   At some point the market will rise, likely quickly.  Melda Mergen, Global Head of Equities for Columbia Threadneedle, recently wrote, “We are very excited about 2023 and we anticipate 2023 will be an inflection point for markets.  We think there is more opportunity in value versus growth stocks.”  While we agree with Melda, remaining diversified is critical versus trying to time or outguess markets.

Carson Investment Research’s Ryan Detrick shared a chart recently.  From 1954 to now, when the S&P 500 has returned 5% or more in the first quarter of a year (such as 2023), there is an 81% chance that markets will be higher in 6 months and a 94% likelihood of markets being higher in 9 months, with an average gain of 9.7%.

Enclosed with this reporting packet are two annual SEC required notices.  We’ve made no reportable changes.  Many financial firms are raising their fee structures significantly.  Our fee structure will not change. Thank you for your continued support, business, and relationships.  We are here to answer questions and help with your financial journey.  We welcome your call, email, or in-person meeting.

Thank you,

Ryan A. Fox, MBA                                                                            Sean C. Huston, ChFC

Greetings from Huston-Fox Financial Advisory Services. We hope you are looking forward to a pleasant fall and holiday season. For clients who have not yet taken their 2018 Required Minimum Distribution (RMD) from their IRAs, we will be in touch soon. If you need help with IRA contribution information, please let us know. Annual tax forms will be out by late January for IRAs and by the end of March for non-IRA accounts.

The U.S. stock market recently passed the ten year mark since the Crash of 2008. There are few signs of recession on the near-term horizon as the fundamentals of the U.S. economy remain strong. While the U.S. economy has continued to expand since 2008, we continue to watch for winds of change that would lead to portfolio adjustments. Inflation remains tame, trade war tensions are slowly being addressed, and unemployment is at historic lows.

The U.S. stock market surpassed the early January 2018 peak in the recent months. Over this same time span, non-U.S. stock markets declined by an average of 13%. Client portfolios remain U.S. stock and bond focused.

The pending Congressional mid-term elections are now center stage. According to Oppenheimer technical analyst Ari Wald, “the fourth quarter of midterm years through the end of the second quarter of pre-election years have been the best nine-month stretch of the four-year U.S. presidential cycle since 1929.” Ryan Detrick, senior market strategist at LPL, stated recently on CNBC that, “Going back to 1950, October is the strongest month again looking at midterm years. Since 1982, October in midterm years has only been down once.”

Federal Reserve recent actions in raising interest rates have also been front of mind for investors. We maintain very short duration bond positions in portfolios that will help generate stronger yields as the Fed raises rates. In fact, as rates rise over the next few years, the bond portion of portfolios will become much more attractive in terms of total return. This will also likely help quality stocks to pay higher dividends over time.

Rising interest rates do not equal poor stock performance historically. During the eleven periods of rising interest rates that have occurred over the past 50 years, stock market returns were positive in ten of the eleven time periods. And the market returns over these ten time periods were in line with historical averages.

During 2018, the Dow Jones Industrial Average stocks have seen 1/3 rd of their stocks enter into correction mode. Within the broader S&P 500, over half the stocks experienced corrections during 2018. Unlike a traditional correction where all stocks seem to fall in concert, this year has been different with various sectors falling in and out of favor. In fact, four large technology companies have made up 50% of the S& P 500 market return for this year. Remaining diversified to avoid such risky concentration is a large part of your portfolio strategy.

Portfolios tend to employ a balanced strategy using stocks and bonds. Taking excessive risk with over aggressiveness is not necessary. Returns since the crash of 2008 help illustrate why balance is critical:

Total Returns from September 12, 2008 to September 12, 2018:

We are here to answer your questions, address concerns, and look forward to continuing to serve you. Thank you for your continued trust, business, and referrals. We appreciate working for you.

Sincerely,

Ryan A. Fox, MBA
Sean C. Huston, ChFC

Greetings from Huston-Fox Financial Advisory. We hope your summer is starting off smoothly.

U.S. stock and bond markets have struggled to stay focused on the underlying strong economic and corporate fundamentals in the face of possible trade wars erupting between the U.S., Canada, Mexico, Europe, and other smaller trading partners. Stock markets despise uncertainty and market returns for the first six months have been flat to negative with international markets getting crushed by an unexpectedly strong dollar.

For the first six months of 2018, the Dow Jones Industrial Average finished lower by 1% while the S&P 500 finished higher by 2%. The AGG or bond market index finished this time frame lower by over 3% due to rising interest rates. The U.S. stock market (S&P 500) started 2018 higher by 7% in January only to experience two downdrafts of 12% and 8% to finish June down about 4% from the January peak.

The Chinese stock market is now down 26% from a recent peak, including down 8% just in the month of June over trade war fears. The German stock market is down 6% for the year. These countries have high stakes in how this trade war/negotiation plays out over the next few months. Client portfolios have been more protected from these downdrafts due to limited international (non- U.S.) stock and bond exposure. Maintaining an emphasis on short term bond funds and floating rate funds on the bond side of portfolios has taken advantage of rising interest rates and reduced risk versus other bond categories such as the AGG.

What these trade war headlines overshadow is the very positive economic news on GDP growth, low unemployment, modest inflation, and strong corporate earnings. Yet, the emotional impact of this trade war talk cannot be minimized. Benjamin Graham wrote the first edition of The Intelligent Investor in 1949. While the text focuses on value investing, a significant portion focuses on controlling investor emotions when dealing with what he calls Mr. Market.

Behavioral finance teaches us the importance of controlling our natural reactions when faced with uncertain investment outcomes. Learning to manage Mr. Market’s focus on current price changes as a way of measuring investment success is a core pillar of the book. Ignoring short term price swings and focusing on investing fundamentals is the touchstone to successful investing.

A study of stock market history tells us that the small S & P 500 gain so far this year is pretty encouraging. Since 1950, there have been 35 years when the S & P was up at the start of summer (June 21). The remainder of those 35 years saw further gains 30 times, and only in 1987 was the loss through December more than 3 percent.

We are here to help with any questions. Pease always feel free to contact us. Our business continues to grow because of your trust, support, and referrals. Thank you.

Sincerely,

Ryan A. Fox, MBA|
Sean C. Huston, ChFC

Greetings from Huston-Fox Financial Advisory Services. We hope your spring season is moving forward in spite of Mother Nature’s best attempts to keep us in hibernation. The U.S. stock market started off 2018 moving higher only to retreat lower in February and March.

Stock and bond markets seem captivated with what has become a hyper-sensitivity to economic news. Headlines have caused investors to wrestle with import tariffs announced by President Trump’s administration and jitters surrounding the Federal Reserve’s ability to normalize monetary policy without impacting economic growth.

In spite of the stock market volatility, the Dow Jones Industrial Average was only down a little over 2% for the quarter and bond prices fell about 1.5%. Non-US stock markets fell, on average, 5% for the quarter. What was the biggest loser of the quarter? Bitcoin, the cryptocurrency, fell by 45%. Client portfolios have no exposure to speculative investments like Bitcoin.

From the end of January’s stock market peak to the end of March, U.S. stock markets fell 11% or into correction territory. As we start the second quarter of 2018, markets are trending lower as high flying stocks like Amazon, Facebook, Alphabet (parent company of Google), Netflix, and Tesla are faltering a bit for numerous reasons. 2017 was a year of historic non-volatility with stock markets higher over all twelve months. We wrote in the 2017 year-end commentary that a return to volatility in 2018 could be expected.

Corrections are normal stock market events. Very little economic data suggests a true “bear market” or recession, however, we remain vigilant and will rebalance when appropriate to take advantage of market swings.

Stock markets move higher and lower in chunks with little long-term ability to predict when these moves will occur. In 2017, the stock market moved 1% higher or lower on a daily basis ten times. So far in 2018, we have enjoyed twenty-one such moves. How about 2% daily stock market moves? In 2017, there were none but 2018 has endured six so far: four to the downside and two to the upside.

Stock markets will rebound, and we will rebalance to take advantage of these periods of time. Bond markets operate differently. Longer duration bond funds are down nearly 10% so far this year while short duration bond funds may actually be higher. Your portfolio holds shorter duration bond funds, so as interest rates rise, your portfolio will benefit quickly with little risk.

Stock market fundamentals remain positive. Corporate earnings are solid, job growth is rising, unemployment is low, and the Federal Reserve monetary policy is geared to help offset any whiffs of inflation that might appear.

We are here to answer your questions, address concerns, and welcome the opportunity to discuss any other financial issues in person or on the phone. Our business continues to grow because of your support and we sincerely appreciate your trust, your business, and your referrals. Thank you.

Sincerely,

Ryan A. Fox, MBA
Sean C. Huston, ChFC