2024.Q1 PERFORMANCE
1st Quarter Recap
The 1st quarter of 2024 is closing out with a strong performance for stocks with the SP500 up 9%. The economy has been stronger than expected and that helped corporate earnings in the 4th quarter of 2023 grow by 7%, about twice what was expected by analysts. Offsetting the economic strength, inflation has remained stubbornly high which led to interest rates gradually increasing higher through the quarter.
The theme of Artificial Intelligence (AI) was the dominant factor with Nvidia rising by 82%, Arista Networks gaining 21%, and Microsoft chipping in at 15% advancement in the first quarter. AI will require significant electricity to power the data centers housing the computational systems and investors have flocked to Constellation Energy gaining 58%. Outside the technology sector, Chipotle Mexican Grill and General Electric both produced above market returns for clients in the first quarter.
Offsetting these gains, a few holdings had company specific challenges. Apple is experiencing growing competition in China and declined 11%, Adobe expected growth is being nipped by new AI competitors dropped by 15%, and EQT has been hurt by a record warm winter that pushed natural gas prices lower leading to the stock declining by 8% in the first quarter.
The Bloomberg terminal provides us with quantitative analysis of factors driving equity returns. During the first quarter companies with earnings momentum (white line) and high returns on capital tended to be leading while companies whose stocks traded at low multiples of earnings (value stocks) and high dividend yields generally lagged (yellow line) as the chart below shows.
Overall, most clients’ portfolios outperformed their benchmarks as equities led gains while fixed income holdings eked out a small gain, although better than the Bloomberg Bond Index that lost about 1%. Now on to the outlook and strategies for the 2nd Quarter and beyond.
Financial Market Outlook for the 2nd Quarter & Beyond
The consumer-led economy will probably continue to grow until something significantly changes. Bloomberg data indicates the average economist Gross Domestic Product (GDP) estimate for 2024 is 2.0% in line with the long-term trend. Although inflation is still too high and lower-income persons’ wages have not kept up with inflation, overall, the economy is growing at its long-term trend of 2%.
Reducing inflation is like a diet. The last few pounds are the hardest to lose.
Consumer spending accounts for over 2/3rds of GDP. With unemployment low, job opportunities plentiful and motivation to spend, the consumer should be able to carry the economy.
Gross Domestic Product Long-Term Trend Growth of 2.0%, Inline with Projections for 2024
Chart Courtesy of JP Morgan Asset Management
Overall, the economy is performing very well, but has a few areas in need of improvement. However, if all economic factors were perfect, it would be time to sell.
While the economy is generally supportive of the financial markets, sentiment, and the flows of funds into and out of the financial markets independent of the economy heavily influence the performance of stocks, bonds, and commodities. Specifically, our favorite short term sentiment indicator of the stock market, the Put/Call Ratio, is showing signs of too much optimism. Also, the historical strength of the stock market from November to May is approaching its end. 80% of the annual gains in stocks have occurred during this period, while the summer and early fall have historically experienced some rough patches. While these are secondary factors, the trend of major indices remains up, which is our primary factor influencing our equity strategy.
Supporting the stock market, the bond market has been relatively quiet with yields inching higher. The 10 Year Treasury Bond yield remains contained under 4.5%, our “line in the sand.” Should yields break above 4.5%, the next stop could be 5% or higher. Higher bond yields would led to investors selling stocks.
Although inflation is still stubbornly too high, combined with economic growth, credit risks are declining, which is good for lenders and lowers the risk of an economic downturn. Bloomberg provides data on the yield spread between Treasury bond yields and lower grade corporate bond yields in the chart below. The decline in the spread shows that investors are willing to accept a lower risk premium for buying riskier debt.
Bloomberg Credit Spreads of High Yield Bonds to Treasuries. The decline suggests that investors are willing to accept risk in the credit markets.
Equity Holdings
Our economic assumption for 2022 is 2% growth and moderating inflation from 3% trending lower hopefully to 2% by year end.
Shifting to our strategies for portfolios, currently most client portfolios are fully invested and over weighted in equities relative to most client target allocations.
Many commodity markets are bottoming after experiencing extensive down trends over the past year. The prospect of central banks in most nations shifting towards neutral policies may be putting a floor under many markets. Another is basic economics of supply and demand. With prices of many commodities including soybeans, corn, and natural gas at the lowest prices in years, supply is beginning to contract as it’s no longer profitable to sell at low prices. EQT, a core natural gain holding, has announced a reduction of drilling after the price of natural gas slipped under $2/per million cubic ft.
The next commodity issue may be weather. After what may be the warmest winter ever for some regions, summer temperatures may lead to demand and supply challenges. The shift from an El Nino weather phenomenon to a La Nina is possible this year. A La Nina could lead to more frequent hurricanes, possibly disrupting the energy markets in the Gulf of Mexico. Further, summer heat and drought could reduce crop harvest, thus higher prices. Similarly, oil markets have supply risks as the Houthi terrorist closed the Red Sea to most ships. The war between Russia and Ukraine is also resulting in supply disruptions. All of these factors increase the chances of higher commodity prices, higher inflation and ultimately, higher interest rates. Recently, we have added to EQT, the natural gas producer and we continue to hold Oneok, the largest pipeline in the U.S. as the commodity related holdings may outperform the SP500 this summer.
When selecting positions for our equity holdings, the most important factor is the company’s competitive advantage. A competitive advantage is the unique attributes that allow it to outperform its competitors. A strong competitive advantage is one that is very difficult to copy for competitors. Often companies with strong competitive advantages produce the highest returns on investment.
Presently, our two largest holdings in most client accounts are Microsoft and Nvidia, both focused on AI products and services. Nvidia dominates the semiconductor market for AI applications while Microsoft uses Nvidia chips for use in their data centers to allow AI applications such as Copilot. AHIA (Andrew Hill Investment Advisors, Inc.) recently began using Microsoft’s Copilot, its new AI tool allows us to increase our productivity by automating routine tasks. Recent portfolio addition Dell computers also will benefit from AI as computers may need upgrades to run the AI applications that require significantly more computations. The next leg of our AI investment focus is on the electricity needed to run the cloud data centers. Most portfolios are overweighed in utilities including Constellation Energy and NextEra Energy, both positioned to benefit from the increase in power needs.
Outside of AI opportunities, our focus on competitive advantages continues to select leading companies. Garmin, a leader in GPS (global positioning system) technologies, reported a strong 4th quarter 2023 results that were significantly better than expectations. The investment industry fails to understand Garmin with only 1 analyst holding a “buy” recommendation of the 8 who research the company.
As the summer approaches record temperatures are likely, especially with greenhouse gases are at record highs (Global Monitoring Laboratory – Carbon Cycle Greenhouse Gases (noaa.gov)). Carrier Corp, a leader in HVAC has recently acquired Viessman Climate Solutions, a European provider of heat pumps, possibly a better way to heat and cool buildings.
Historically, the equity markets have produced returns averaging 10% per year but the range of returns is wide in any one year. Statistically, with a 65% probability, the S&P 500 can be expected to return between -10% and +20% in any given year, making stocks long-term investments.
Fixed Income – Keeping it boring.
Our hope is that the bond market remains boring with little change in yields this summer. Given that inflation is remaining above the Federal Reserve’s 2% target, it is possible that the expected cut in short-term Fed Funds from 5.25% does not occur. If short-term yields hold near current levels, it is possible that the 10-year Treasury Bond also holds near its current yield near 4.3%.
With our expectation for a static bond market, we will continue to focus on maintaining bond ladders of investment grade bonds in client portfolios. These bond ladders are customized to meet each client’s potential portfolio withdrawals over the next 5 to 7 years usually. To complement the bond ladder strategy, we continue to hold preferred stocks of Key Bank and JP Morgan in some portfolios. Both of these issues yield around 6%, significantly above the yields of most investment grade bonds, although preferred stocks do have added risks.
For taxable accounts, a combination of short-term Treasury bills and notes floating rate (yields move up and down based on short-term yields) and tax-free municipal bonds for longer – term (7 years or longer) maturities is a nice mix of predicable returns while having issues that can be sold easily if cash is needed. In tax exempt portfolios, such as IRA’s and pension accounts, we usually invest in taxable corporate and municipal bonds.
The Impact of Passive Investing
In the last 50 years, most working people have adopted “Passive Investing” as their main way to save for retirement, using 401(k)’s, IRA’s, and Target Date Funds. Passive investing, which involves the “Buy and hold” strategy, is very common. However, its simple nature means that investments are made without paying attention to broader economic trends or individual stock valuations. As a result, a large portion of the market—estimated between 30-50%—is now in passive funds, which could affect how the market behaves.
The issue that is emerging is the large discrepancy in the market between buyers and sellers, since passive funds control 1/3 of the market. Passive fund investors will keep buying and not selling, regardless of whether the market is at the lowest or highest point. This causes stock prices to rise above what the actual business is worth. This means that stocks are not being bought or sold based on the value of the business, as shown by less trading based on fundamental financial analysis.
Passive investing is also becoming more popular than active investing. While passive investing offers lower expense fees, it comes at the expense of active oversight. Actively managed funds benefit from continuous monitoring of markets and economic conditions, passive strategies lack this dynamic supervision. Consequently, investors may miss out on strategic opportunities to adjust portfolios in response to market shifts and capitalize on potential downturns, for example “buying the dip” during bear markets. Again, the inflow of capital into passive funds contributes to a scenario where each dollar invested is immediately turned into a buy order, potentially inflating stock prices regardless of underlying fundamentals.
At AHIA, we excel in providing active management strategies that have outperformed passive investing through a comprehensive fundamental approach. Our team analyzes stocks to identify the best investment opportunities, ensuring that our portfolios are positioned for long-term growth. Additionally, our trend-following approach allows us to dynamically allocate capital to stocks experiencing upward momentum, maximizing returns in favorable market conditions. Furthermore, we adopt a proactive stance by reducing exposure to stocks and adding to short-term money market funds in the early stages of market downturns allowing us to minimize losses, a clear advantage over a passive strategy. The funds we favor are the Fidelity Conservative Bond fund and the Fidelity Floating Rate fund. Both funds have a low expense ratio and have yielded over 5% return over the past year. This disciplined approach enables us to reinvest strategically when we anticipate favorable market conditions, ultimately delivering superior risk-adjusted returns for our clients.
Roth IRA & IRA Contribution Deadlines 2023
From Fidelity.com
If you have a traditional IRA or Roth IRA, you have until the tax deadline, or April 15, 2024, to make contributions for the 2023 tax year. You can contribute up to $6,500 to your IRA if you’re under 50 or $7,500 if you’re 50 or older for tax year 2023, subject to limitations based on your income.
SEP IRA contribution deadline 2023
If you’re a small business owner with a Simplified Employee Pension (SEP) IRA, you have until the due date for your business tax return—including extensions—to make your 2023 SEP IRA contributions of between 0% to 25% of total compensation, adjusted for self-employment taxes and the selected contribution percentage (with a maximum of $66,000). Tax filing deadlines (and therefore SEP IRA contribution deadlines) vary by business structure.
SIMPLE IRA contribution deadline 2023
Because SIMPLE IRAs are essentially IRAs that are eligible for both employer and employee contributions, they have 2 different contribution deadlines. This is an important distinction to be aware of if you’re self-employed and contributing as both an employee and employer, as you may have more time to contribute as an employee or the employer.
The Employee 2023 deferral contribution must be made as soon as possible but no later than within 30 days of the end of the month that the employee’s pay was deferred. For pay deferred in December 2023, the deadline is as soon as possible but no later than January 30, 2024. Employers have until the due date of their business tax return for tax year 2023—including extensions—to make matching or nonelective contributions.
The maximum SIMPLE IRA employee contribution for 2023 is $15,500, plus an additional $3,500 for those 50 and older.
What MED-LAW INSIGHTS Offers
- Review MEDICARE coverage.
- Review MEDICARE and MEDICAID coverage.
- Review MEDIGAP &/or PRESCRIPTION DRUG plans and costs to determine if it still meets the client’s current needs.
- Determine if the current MEDICARE ADVANTAGE plan is optimized for client’s current medical needs.
- Work with client and/or family members to MINIMIZE out of pocket expenditures for the remainder of the plan year.
- ENROLL client in a NEW PLAN if appropriate.
- REASSURE clients if they are already in BEST plan for their current situation, and they that should not be stressed by “cold callers” pushing them to make inappropriate changes.
- Return after October 2024 to review 2025 Plan Changes and determine whether it will be best to keep current plan or enroll in new plan.
- Be available throughout the year to advocate for clients and family members for disputed Plan coverage decisions or charges.
- Become the Agent of Record for clients who currently do not need to make any changes, but do not have an Agent to advocate for them.
Standalone Dental, Vision and Hearing Plans are also available.
DID YOU KNOW THAT MEDICARE DOES NOT COVER ALL OF YOUR SERVICES REGARDING HEALTH CARE?
Many people are surprised by this, especially when they receive unexpected big bills.
Let’s cover 5 common services that Medicare does not cover so that you can avoid those surprises and better plan for the health care services you need.
- Medicare does not cover long-term care expenses.
Medicare does not cover long-term care (like a nursing home). If you’re going into a nursing home, you will likely pay for that out of your own pocket if you do not qualify for Medicaid.
- Medicare does not cover dental.
The government does not consider dental to be medically necessary, therefore Medicare does not cover it.
There are some Medicare Advantage plans that include dental coverage, however, if you don’t have an Advantage plan that includes it and you want dental insurance, there are plenty of other ways to get those plans.
- Medicare only covers “medically necessary” vision concerns.
“Medically necessary” vision issues are cataracts, glaucoma, macular degeneration, and things of that nature. They are covered if you get that treatment from a doctor who accepts Medicare.
Things like eyeglasses, annual eye exams, and contacts, are not covered by Medicare.
- Medicare will not cover hearing aids.
Original Medicare does not cover hearing aids. It’s hard to find coverage for hearing aids in general as they are expensive. Medicare will, however, cover if you have an issue with your ears like balance or if your doctor orders a diagnostic hearing test.
- Overseas travel.
Medicare generally doesn’t cover health care outside of the United States. However, Medicare will cover medical emergencies within a specific timeframe of you being overseas. So please do not assume that Medicare will cover you the same on your overseas trip.
OUR TEAM
Andrew “Andy”
D. W. Hill, CFA
President and
Co-Founder
Jennifer R.
Figurelli, CTFA
Managing Director
and Co-Founder
Elicha D.
Moore
Client Concierge
Representative
Sean
O'Brien
Associate
Portfolio Manager
