April 1st, 2024
All Atlas Clients –
Don’t blink, but it’s April! Avid readers of this newsletter are probably laughing because I say this every quarter as time is just passing us by quickly. Hopefully you started off the year well and looking forward to Spring weather and beginning to enjoy the outdoors. Of course, your money and net worth is important, but not as life critical as your health. Before you let your mind wander on the previous sentence, no, this not a preach on how to live your life or tips on leading a healthier lifestyle, but a point to enjoy your life and don’t let the noise make you succumb to not living it. Many interesting things are going on in our economy and internationally. We swim in this world every day and will share some thoughts on how this may impact you both positively and negatively depending on your life stage.
Of course, there will be no political speak or opinions in this newsletter, but temperature will be rising as we head into the summer months and November Election. Between now and then, expect the market volatility to tick up precipitously. This means ignore the short and medium-term fluctuations and gyrations and focus on the longer-term. Positions that are not high-quality or in slower growth-oriented industries will underperform during volatility spikes in the market. If you can’t handle volatility in the market or your portfolio, let’s set up a call and review those positions that may impact and make you more worrisome. We will focus and discuss on the two main areas that will impact the market the most outside of geopolitical shock events.
Those two areas are the 10-year Treasury Note and the Fed Interest Rate (FOMC decisions). Why are these two of the most important areas? They are typically not discussed at your job or brought up at the dinner table or top-of-mind topic conversation with your friends. They are the two factors that will have a direct impact on both domestic and international markets. We don’t need to remind you of the last 24 months with inflation and the Fed (FOMC) raising rates at a historic pace. This hasn’t stopped people from dining out 3, 4 or more times per week at elevated prices. I had a breakfast meeting a few weeks ago for two people and it was $46 with gratuity. Really? Eggs, toast, potatoes and coffee…..$46! No, there weren’t any Truffles on the potatoes or eggs! Remember, it’s not about the gross amount you make, it is about how much you take home, and inflation is affecting us all.
First – 10-Year Treasury Note is known as the “north star” of the market and as it rose to 5.02% in October 2023, the broad market had pulled back about 10% from its recent high. Investors see the 10-Year Treasury as a way of measuring risk and good bank risk managers watch the 10-Year very closely. Think about it, if you are near or in retirement and you are worried about everything going on in the world, in October 2023 you could put a chunk of money in the 10-Year at 5% and relax as that is risk-free and a guaranteed payment by the government. As of the writing of this Newsletter, the 10-Year is at 4.32% and key bond people see it rising towards 5% again before the November Election. This means if people are fearful about the economy and the markets, they can put their money in a risk-free investment for 10-Years at or near 5%. Ultimately there will be a rotation out of equities (sell-off of positions) from being at-risk to Treasuries which are “no risk”. Just as a note, the 1-Year T-Bill is 5.07%, 2-Year is 4.74% and 5-Year is 4.33%. The conclusion is Treasuries will provide security and “investment optionality” for those that seek to park money and feel safe. Two years ago, Treasuries were not a real option for any type of return, now it is a consideration. This strategy isn’t for everyone, but short-term for a smaller percentage of your portfolio should be considered prudent and smart investing. Everyone loves it when the market goes up and wants none of the downside (who doesn’t!), but realistically diversification is back in style with longer-term investing.
Second – the FOMC (Federal Open Market Committee), a.k.a “the Fed” is always the focus about every 6 weeks or so when they meet and discuss the status of the economy and whether or not they are making a change on the Fed Interest Rate. Currently it is sitting at 5.25%-5.50%. The last rate hike was in July 2023. Economists and Market Strategists look at history when it comes to rate hikes, number of months before a rate cut since the last rate hike and the lag effects of when the Fed began raising rates. Personally, we follow a lot of smart people that are students of market history and Fed Rate hikes and cut cycles. In past Newsletters we noted that when the 2-Year is higher than the 10-Year that is identified as the “inverted yield curve” which means people are fearful of the future and buying shorter-term Treasuries to park their money and wait. We just surpassed 24 months since the current inversion was initiated in March 2022 and economists will state that on “average” after the yield curve first inverts the average recession happens within 16-22 months (that’s the average). Why so long? It is called the “lag effect” and it takes a while for inflation to come down, banks need to adjust their risk and that affects key businesses and industries by slowing hiring, purchasing and velocity of sales. But the consumer has been very resilient and strong throughout as Employment sits at 3.9% (March Unemployment number due to be released on April 5th). As we mentioned in our last newsletter, as it ticks above 4% and heads towards the 4.5%-5.0% range, this is where the lag effect is definitely taking its toll on the economy. Many economists and strategists will tell you that you need a “flush out” (or a purge) of credit and a pull back in the economy, almost like a reset or breather, before the economy can expand or continue to expand. They identify this as a “healthy pullback” in a Bull market. Based upon the smart people we follow; they are/were expecting that to happen in the 1st half of 2024. Now that we are 3 months in, is this slowdown right around the corner? Tough to tell. Last year (late summer) the market was expecting an Interest Rate “cut” in December, didn’t happen. Then they expected one in March 2024, didn’t happen. They were even predicting (via Fed Futures on the CME) up to six(6), yes 6 rate cuts in 2024. We definitely don’t see that many rate cuts happening, especially in a Presidential Election year. The only way you could have that many cuts is if there was a major economic shock then it would be a steeper cut, not several small .25bps cuts. Now financial media is talking May or June rate cut(s)…………..PLEASE! Folks, there is a real possibility that there might not be any cuts at all in 2024. If the consumer is still spending and not losing their jobs why would they cut rates, to help the housing market as the 30-Year Fixed Mortgage Rate hovers around 7% +/-? Doubt it.
How does either of these two factors (10-Year and the Fed) affect you? If the 10-Year continues to head towards 5% or higher, this will be negative for the market as investors will rotate out of equities and into the 1, 5 and 10-Year Treasuries. If the Fed is lowering rates this means something (or a combination of things) negatively happened in the market (or geo-politically) and the market will pull back. Don’t just read the headlines and if you don’t want to dig down into those specifics, reach out to me and let’s discuss further. We have brought up these two factors in the past, but as we approach the Presidential Election in November, these factors will become political footballs and perceived pressure on the Fed to do something (or nothing) will be applied via the press/media.
These two major factors that will affect your portfolio are above and beyond the eroding economic factors that have continued to trend down over the last 18+ months. Watch the Unemployment number on Friday, April 5th along with Q1 GDP numbers. These are important numbers and ones that have had resilience pushing up the market. Watch our podcasts to keep up with what’s going on in the markets and economy.
At the minimum, diversification should be applied to your portfolio. As the political season heats up and headlines push around select positions in your portfolio, other positions should not be affected as much. This is why diversification and a balanced approach to portfolio positioning is encouraged by us. Remember, this newsletter is meant to inform and possibly entertain you in a quick read. This is why we try to cover and discuss areas that you should be aware of, but you should not necessarily worry or be consumed by this on a daily or weekly basis, that is our job.
In Summary
The markets are fickle my friends and we do our best to navigate the murky waters and steer you around as much volatility as possible. Certainly better than piloting a cargo ship through the Baltimore Harbor and under a bridge (sorry, too soon?). Even the smartest people in the Investment world have no idea what the Fed is going to do or where Bond Rates are going or if we are at or near a top in the market. Don’t just follow the S&P 500 Index! This used to be a good gauge of the broad market and health of business and industry. It is broken! The index is “market cap weighted”. Meaning the more valuable a company is, the more it has an effect on the index. To prove the point; in 2023 the Top 10 Stocks made up around 75% of the index move. The rest of the stocks would essentially be flat-to-negative in 2023. What about the other 490 companies? Also, the Top 7 stocks were responsible for 32% of the returns. What do we(Atlas) use as a Benchmark for growth-oriented portfolios? We use a blended approach with two(2) ETF’s; RSP is a S&P 500 Equal-Weighted Index and OEF which is an S&P 100 Equal-Weighted Index. This has proven to smooth out the heavily weight stocks and identify the strength of the overall market with the Top 100 Companies in the world. The headlines are meant to grab your attention to suck you into their web page so they can display their paid advertising. Many times, they will just update or revise articles over several days and weeks to make it seem that it is new news, but it really isn’t. I’ve spent a lot of time in this area and advised many clients to filter out the noise with many of these articles in financial media. Our tip to you is the following; consider the source of your articles and facts (with everything) and don’t get emotionally tied to stocks or select positions. We like a Buy and Hold strategy on select positions and add to high-quality positions over time. This will compound returns in the long run, but this doesn’t mean you should be heavily weighted in only a few positions, but consider re-allocating as select positions become too high of a percentage of your portfolio.
As always, please reach out to share your thoughts. Be safe and healthy!
With Best Wishes,
Ronald E. Lang, Principal and Chief Investment Officer
Atlas Wealth Management, LLC
REMINDER:
I participate in a frequent Podcast called, “Cents of Things” with an Advisor friend of mine and you can access that library of episodes when you available time. This is available on YouTube and you can also access this from our home page. We try to keep the conversation light with a bit of Pop Culture and some economic and market thoughts on what is going on now and how we see things panning out in the short and long-term. Many colleagues of mine have podcasts and we will continue to participate in these episodes and post other video’s on the markets and economy throughout 2024. We do have a YouTube Channel that you can access and “Subscribe” too called, “Atlas Builds Wealth” channel
We have posted our two webinars from September 2023; you can access this from our home page also. These are “on-demand” video’s and you can watch them whenever it is convenient for you. They have been edited for time and you can certainly share them with friends, family and colleagues.
PS> Want good economic and financial reading? Do a search for Warren Buffet’s shareholders newsletter in 2024. Always good nuggets.