Members' Wealth Quarterly Update | Q4 2023

Happy New Year!

We finished our third quarter letter’s first paragraph with this: “Recently, there seems to be a lot to be negative about. So why are we the most optimistic we have been in a long time? Mostly because others are so negative.” Our optimism paid off in the 4th quarter (See Graph: 2023 Total Return) as stocks and bonds both experienced significant gains. We do not always get the short-term outlook right and we generally would not note it, except when it supports our investment philosophy and serves as an educational opportunity.

This example is for illustrative purposes only and does not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.

At Members’ Wealth, our investment philosophy should be and is weighted toward long-term strategic thinking vs. short-term forecasting. But as one client noted recently, “I know you cannot look around the corner, but can you try?” As a little boy, I was fascinated with a little toy periscope to spy around the corner…wonder if that is still in Mom’s attic…

Long-Term Thinking, Short-Term Awareness

We appreciate the famous quote: 'The long run is a misleading guide to current affairs. In the long run we are all dead,' written by John Maynard Keynes in his 1923 work, A Tract on Monetary Reform. Though often abbreviated, to “In the long run we are all dead”, we feel the full quote better captures the essence of our mission for investors at Members’ Wealth.

At Members' Wealth, our goal is to assist clients with long-term planning and investing while also addressing short-term needs. This includes managing cash flow, tax, risk, and making timely investment adjustments. Our approach ensures clients stay on course, or even capitalize on short-term opportunities. However, we emphasize the importance of balancing short-term actions with long-term objectives, avoiding excessive risks that could jeopardize future stability. The key is finding the right balance between short-term and long-term thinking. So, what is the right balance?

We usually conclude, tongue in the cheek, “the right amount”. Or more commonly, it depends! Read on to see where we are seeing both short-term and longer opportunities and risks for 2024.

The Backdrop

The year 2023 transcended the usual focus on stocks and bonds. These financial indicators are just surface reflections of deeper global changes. Consider the scientific milestones: The FDA's approval of 55 novel therapeutics marked the second highest in three decades[i]. Breakthroughs[ii] in fields like fusion, artificial intelligence, and astronomy have been significant, yet often overshadowed by war, tragedy, and political strife that dominate media narratives. It's crucial to remember that while negative news may capture attention, positive developments, often overlooked in the moment, are also busy shaping our future.

Turning to the economic landscape, we observed complex dynamics. The student loan debt forgiveness program's end left a staggering $1.6 trillion unpaid. Mortgage rates spiked to 8% before easing, a stark rise from below 3% just a year or so earlier. Meanwhile, credit card debt soared to an all-time high of $1.08 trillion, with interest rates exceeding 20%. However, there were positive signs too: inflation began to ease, and unemployment remained stable around 3.6%. Let’s turn to the specific asset classes for a closer look.

Cash

With its safe returns in 2023, cash lived up to the hype as a place to park your assets to avoid the negative impacts of recession on one’s investment portfolio. It did its job, of positive returns with no volatility. But as far as a hedge against recession, cash came at quite the opportunity cost, as no recession materialized, and US equity markets roared to high returns. We talked about the risks of cash from a reinvestment risk perspective through the year. Again, on an absolute basis, this risk did not really materialize until late October/Early November. Yield on cash is still attractive and if you need to park assets somewhere for the short run, you continue to smile at cash prospects. 😉

High Quality Bonds

We have to say: Wow! What a year. From 3.8% on the 10-year Treasury to start the year. To north of 5% at its high, only to see yields fall just as fast to close the year at 3.8%. A round trip of epic proportions.

The move from the interest rate lows back in May to the highs at the end of October was about as exciting as it comes in high-quality bond investing. Where appropriate for an individual investor, we took advantage, where we could, to extend the duration for investor portfolios. And then in a blink of an eye, 5% yields on Treasuries were gone. The question now remains, will we see 5% yields again or are the highs in? While we are no better at interest rate forecasting than most, we are mindful of history and the strength of the American economy and are not going to be surprised to once again approach or surpass 5% interest rates on the US 10-year Treasury. In the meantime, we excitedly manage bond portfolio for safety and YIELD (something we went over a decade without).

High Yield Bonds

High Yield bonds, also known as “junk” bonds or lower rated bonds, in our opinion have been the winner in bonds in 2023. Not only having positive returns throughout 2023 but recovering from losses suffered in 2022. This is unlike their high-quality bond counterparts which are still underwater for the same period. See Chart below comparing HYG (iShares iBoxx $ High Yield Corp Bd ETF) and AGG( iShares Core US Aggregate Bond ETF), ETF representations of their respective indices.

Although returns on high yield have been attractive, we caution investors to always tread lightly in lower quality issuers as they face higher costs of capital and are more economically sensitive than their high-quality counterparts. Therefore, where it makes sense for some investors to have exposure to this asset class, we currently think a defensive, active approach here is appropriate. Buying a higher yielding, lower quality bond should be left to those that have a sound investment plan, due diligence process, and the financial ability to weather the potential losses of such a purchase.

Alternatives

A catch-all category for non-stock and non-bond investments, alternative investing means different things to different people. Each quarter we try to educate investors on one of the many “alternative” investments.

This quarter we will highlight commodities which also experienced a significant amount of volatility in 2023, ending with slightly negative returns for the year. Commodities are an inclusive term for everything from rice to oil. In 2023, energy prices were the primary driver of returns, as energy is the largest component of most commodity indexes. (See Graph Below)

Geopolitical fears related to the Middle East, higher-than-expected supply conditions, and fears over a slowing global economy all weighed on potential demand. Industrial metals also fell back, related to weakness in China, while precious metals (gold and silver) earned double-digit returns for the year. As is fairly typical in the investment world, when an asset class underperforms it loses its desire to be held by investors. In a recent Bank of America Global Fund Manager Survey (See Graph: Biggest UW in Commodities since June 2017), commodities in general are the most underheld in professional portfolios since 2017. While the pessimism starts to liven up our smell of a contrarian opportunity, commodity investing is not for the faint of heart, nor simple. Where appropriate, clients have some exposure in their portfolio. If you want to talk more about it, please let your advisor know.

Equities[iii]

2023: The U.S. stock market experienced solid gains in 2023, which included a routine -10% price correction in late summer, before recovering strongly in the fourth quarter. S&P 500 returns have been led by the ‘Magnificent 7’ group of stocks (Amazon, Apple, Alphabet/Google, Meta Platforms, Microsoft, Nvidia, and Tesla), while the remaining 493 firms in the index experienced solid, but less dramatic results. The following chart shows just how dramatic the outperformance of a few relative to the index stands relative to history.

Within the Russell 1000 Index, which contains stocks of the largest large and medium-sized U.S. companies, ‘growth’ stocks sharply outperformed ‘value’ stocks, due to that technology and communications influence, driven by strong fundamentals and excitement over artificial intelligence.

Value sectors remain heavily discounted relative to growth sectors in the universe of large company stocks. Additionally, while U.S. smaller company stocks underperformed large company stocks during the year, they remain valued at multi-decade lows relative to large company stocks, providing an attractive forward-looking investment opportunity.

As ever, diversification remains important, both by including different asset classes in your portfolio but also by diversifying several types of securities within an asset class.

Outlook: We suspect the recent bullish mood in equities may give way to a consolidation into spring. That would only be natural and welcome. Up is great. Unrelenting straight up without a pause makes us nervous. So, as we continue to hope for a healthy market and remain longer-term positive, we would not be surprised by some sideways actions to start the year. But we tend to believe there are a number of reasons to remain bullish in 2024. Chief among the reasons[iv]:

1. Interest Rates are back to “normal,”
2. Jobs – There are still plenty and unemployment remains low,
3. Consumers continue to spend,
4. Wages are back growing in real terms (See Real Average Earnings in Private Industry Graph below),
5. A record $5.9 trillion is in money market mutual funds (MMMF) with a record $2.3 trillion in retail MMMFs,
6. Onshoring and Federal Incentives have created a capital spending boom,
7. Inflation is subsiding,
8. Productivity Increasing. (See Below: Graph Nonfarm Business Productivity Growth Cycle)

We found this interesting. According to Ed Yardeni, founder of Yardeni research, “The current bull market started on October 12, 2023. It received a big boost when AI-related stocks took off late last year. OpenAI launched ChatGPT on November 30, 2022. We believe that date is when the stock market first started to discount our Roaring 2020s scenario. At first, the bull market was narrowly based, but it since has been broadening to include more sectors and industries. We believe that reflects investors’ realization that the beneficiaries of the Roaring 2020s theme aren’t just the companies that make technology but also those that use it to boost their productivity—i.e., companies generally whatever their industry may be.”[v]

Seems Mr. Yardeni shares in our optimism and that a Roaring 2020s scenario is looking not only possible, but also probable. Time will tell but we caution investors about getting too negative in the short-term when they have long term investment horizon.

One final note on equities: We get a lot of questions about presidential election years and there are many different ways to frame the response.

“The average return of the S&P 500 in the presidential election years shown above[vi] is 10%. Stripping out the global financial crisis and the dot-com bubble, the S&P 500 gained an average of 15.3%.”[vii] (HAHA! Only stripping out 2 of the biggest crises of the last 40 years.). Either way, history leans positive in presidential election years, which is a nice anecdote, hardly something to hang your hat on, but we would suggest staying invested just in case!

But should I go in now?

Strategically, in most circumstances, where investors are to have an allocation to equities, they should not try to time the stock market. That doesn’t mean you should not lighten up your allocation to sleep better or increase it a bit to be opportunistic from time to time.

For those that are more than 10% off their long-term target and are worried about timing to get to their long-term target, we typically talk about the pros and cons of waiting, how to close the gap and the speed at which you should close the gap.

To sum it up, enjoy the year investing, and be optimistic, but not out over your skis.

Important Financial Reminders for Investors in 2024[viii]

1. Maximizing 401(k) and other retirement Contributions: As we embark on a new financial year, we encourage investors to consider increasing their retirement contributions to the maximum limit. This is a crucial step in enhancing your retirement savings and taking full advantage of potential tax benefits.
2. Catch-Up Contributions for Those Aged 50 and Over: If you have turned 50, don't forget that you are now eligible for catch-up contributions to your retirement accounts. This opportunity allows you to further bolster your retirement savings.
3. Reinstating Contributions for High Early Earners & Savers: For investors who reached their maximum contribution limits early last year and consequently paused their contributions, it's essential to reactivate these contributions to continue building your retirement savings.
4. Understanding Non-Maximum Contributions: If you are not currently maximizing your retirement contributions, we would appreciate understanding your reasons. This insight helps us to better tailor our financial advice and services to your needs.
5. Updates on Gift and Estate Tax Exclusions: 2024 sees changes in the annual gift exclusion amount, as well as adjustments to the federal estate tax, gift tax, and Generation-Skipping Transfer (GST) tax. We are also another year closer to sunset provisions, so remember to talk with your advisors about the impact to your situation.
6. Fourth Quarter Estimated Tax Payments and Early Filing: The deadline for the fourth quarter estimated tax payments is January 16, 2024. However, if you file your 2023 taxes by January 31, 2024, no additional payment is required.
7. Inflation Adjustments: Please refer to IRS document IR-2023-208[ix] for a comprehensive list of inflation adjustments that may impact your financial planning.

We recommend reviewing these points carefully and taking any necessary actions to align with your financial goals for 2024. As always, we are here to assist with any questions or concerns you may have.

Thank you

Thank you for a wonderful first year at Members’ Wealth. It was truly a success.      

[i] https://www.nature.com/articles/d41573-024-00001-x ; 2023 FDA Approvals, Nature January 2, 2024

[ii] https://www.bloomberg.com/opinion/articles/2023-12-30/the-10-most-intriguing-science-breakthroughs-of-2023

[iii] Excerpts from Q4 2023 Letter of an Advisor of The H Group, Inc., an affiliated RIA of FocusPoints Solutions

[iv] https://www.yardeniquicktakes.com/deep-dive-a-dozen-reasons-to-remain-bullish-in-2024/

[v] https://www.yardeniquicktakes.com/deep-dive-a-dozen-reasons-to-remain-bullish-in-2024/

[vi] https://twitter.com/Barchart/status/1739792910667645204?s=20

[vii] https://www.nasdaq.com/articles/why-buy-stocks-in-a-presidential-election-year-history-has-a-crazy-stat-for-you

[viii] Written by Members’ Wealth with curation and editing from ChatGPT.

[viii] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024

The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. There is no duty to update this information. Illustrations provided are for presentation purposes only. Actual investment experience will vary with stock selection and changing market conditions. Investment advisory services offered through Member's Wealth, LLC, a registered investment advisor. The Dow Jones Industrial Average (DJIA) is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The National Association of Securities Dealers Automated Quotations (NASDAQ) is an American stock market that handles electronic securities trading around the world. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Bloomberg US Aggregate Bond Index, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

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CS Planning Corp., doing business as, Members’ Wealth LLC provides investment advisory, wealth management, and other services to individuals, families, and institutional clients. Advisory services are offered through CS Planning Corp., an SEC registered investment advisor. Members’ Wealth does not provide legal, accounting or tax advice. Please consult your tax or legal advisors before taking any action that may have tax consequences.

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