Perspectives
Quarterly Market Newsletter
Fourth Quarter, 2024
The second terrific year in a row; would you have thought that the U.S. stock market would produce two sequential annual returns over 20 percent? Probably not, yet here we are. What may be the more pertinent question is what happens now? The next Forecast section of this letter tries to give an answer.
Nevertheless, a good year is a good year, and we should all take it with grace. Not only did stocks do well, but the bond market also finally had a much better year. After rates went to near zero, the only place for them to go was higher. Higher rates depress the value of existing bonds. Now that longer-term rates seem to have leveled off, investors are seeing more stability in their bond portfolios. Values are holding and interest returns are much better and more normal. They more accurately reflect inflation and credit risk.
Inflation has receded from its peaks and provided fuel for the rally in stocks. It is still not at the two percent Fed target but getting close. Where inflation goes from here should be an important determinant for future stock market returns. We will see!
Getting the presidential election behind us was important, but the results were somewhat anticipated. There was a Trump trade long before the results were known. Afterwards, there was celebration with a significant stock market rally. We will see how long the enthusiasm lasts. Much of this will depend upon what policies the new administration enacts.
Forecast
Economy
Economic growth looks to be continuing at around two-and-a-half percent or higher. This is excellent for our large and diverse economy. There is nothing on the horizon that indicates that growth will not persist. However, policy errors by government, and large, surprising macro events such as war, or currency or bond market turmoil could certainly derail the current good environment. Absent those, growth should continue.
The new presidential administration promises to bring major changes to government and policy. Whenever big changes are proposed or enacted, their effects on a very complex system like our economy can be unpredictable. Because of this and other reasons, Riverplace Capital is taking a more cautious stance.
Equities
Riverplace Capital went into the year-end with higher than usual cash reserves. Clearly, we believe we may experience more volatility and want the ability to pounce when presented with opportunity. Recently, we have noted technical deterioration in the stock market. Also, with a new administration taking power soon, there may be many policies that change or influence investors’ outlooks. With these and more, a cautious approach seems appropriate.
The election euphoria may not last. Soon, hope and optimism will be replaced with reality. However, most of our investment strategies continue to be focused on the long term. This is clearly reflected in our individual selections.
We continue to focus on individual companies rather than the broad averages. If we select and hold companies that grow, their values will too!
Fixed Income
Bonds and fixed-income instruments now pay rates that are investable. This is a change from the past few years when they were clearly too low and did not reflect inflation and credit risks. Our policy is to not extend commitments beyond five years. Shorter maturities give almost as good a rate as longer ones. There is just too much risk in committing for much longer. After all, who would have predicted anything about the last five years? It is better to have flexibility.
We like to establish a ladder of maturity dates with maturities extending from the current year out to the fifth one. That way, some capital is being returned every year. Then we can decide where, in our string of maturities, we reinvest. Current conditions and expectations can be considered.
Investment Strategy
Equities
With higher than usual cash reserves, we are looking for opportunities to pick up bargains to add to portfolios. We anticipated the recent sell-off and are watching a list of potential acquisition candidates. We do not need to be in a hurry. It is likely that the current correction will last for a while. There are many sources of uncertainty. It will take time to see where government policy and our economy are headed.
Longer-term, we are as optimistic as ever. It’s just the near term that presents challenges. With our higher cash balances, we are trying to turn this period to our advantage. At the same time, we are not out of the stock market. We are still substantially invested.
Fixed Income
No one can anticipate what interest rates will be available a few years from now. Given that we use fixed-income allocations as a risk reducer, we are unwilling to take the risk of owning longer-term instruments. We prefer issues with maturities of less than five years. During times of unusual uncertainty, we keep maturities even shorter.
The shorter the maturity, the less risk in owning a less desirable bond paying too low an interest rate. These get discounted in value and can result in losses if sold. Laddering bonds by maturity from the near term out to five years prevents this. This strategy provides some amount of capital returned every year. Even if rates move against us, with shorter maturities we can simply hold an issue until it matures.
Quality is key to meeting our mandate for reducing portfolio risk. Credit risk is avoided as much as possible. In case of an emergency, high-quality fixed income instruments have much better liquidity than others.
Wealth Management
When the stock market broadens out, our asset allocation strategies benefit. That has been the case for much of this past year. What hurts this approach is a very narrow market with only a few issues or sectors dominating any uptrend. Then our diversification is a drag.
Remember, diversification has offensive as well as defensive characteristics. Over time, opportunities come from many different sectors. By having a broad net, we are likely to benefit from new opportunities. Therefore, we have maintained this approach even during times when the stock market performance became narrow.
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Most stock market predictions are simple trend extrapolations. What is trending is assumed to continue. Small, measured changes are what is expected. However, the world does not work that way. Yes, trends can last for long periods, but then big changes come and there is a sudden lurch. These events are sometimes referred to as “black swans,” rare and unexpected.
However, in the real world, black swans are not so rare. They are a little like the 100-year flood, or storm that seems to occur somewhere every few years. Wars can come unexpectedly as well as many other man-made disruptions. This is simply how the world works, not in a smooth progression.
Investing must recognize the reality of the unexpected and the unpredictable. Diversification and appropriate allocations that keep near-term cash reserves, and flexibility are key tools that can help manage assets in the face of volatility. It also helps to understand clearly the underlying value of each asset and the goal being pursued. Both these help to maintain perspective during volatile periods.
Recognizing that we will always have black swan events, good strategies seek to be able to take advantage of them. When others overreact out of fear or misunderstanding, and opportunities abound, the smart course may be to pounce and aggressively add to good assets.
Therefore, with the correct attitude and perspective, uncertainty and volatility can be advantageous. This all ties into what many famous investors have advised, “buy when others are selling and sell a little when the crowd is ebullient and buying.”
as of 12/31/2024
23.3%
Dow Jones Industrial Average
12.9%
Mid Cap Stocks (S&P 400)
12.2%
NASDAQ Composite
28.6%
Small Cap Stocks (Russell 2000)
10.0%
MSCI EAFE
1.15%
Barclay Aggregated Credit Index
2.0%
Inflation
2.5%
(Equity indices are nine-month returns excluding dividends)
Be fearful when others are greedy and greedy when others are fearful.
- Warren Buffett
Notice
Riverplace Capital is offering a free financial plan ($1,500 value) for anyone, not just our clients. Information is powerful and knowing how well your needs are being covered can help you make better decisions during this time of heightened uncertainty and stress. You may want to analyze a variety of “what ifs.” Can you be more aggressive with your investments, or should you be more conservative? If you get sick, how well can you manage through the illness? Other questions may come to mind that cold rational analysis can help you see through the fog of the moment.
Free is free and no one is under any obligation to Riverplace Capital. The Bull and his partners want to help investors make the correct decisions. In other crises, we have seen too many people do great harm to their financial futures. This can be avoided with the proper analysis and counsel. It is important to stay on a disciplined path. You may need to make changes, just do them as part of a rational plan. Let us help you.