PFP - October 2024 Newsletter

Wealth Insights: Navigating Market Uncertainty with a Balanced Perspective

Dear Valued Clients,

As we traverse through the complexities of the current market landscape, it’s essential to keep a balanced perspective, especially in light of evolving economic indicators and market signals.

Current Market Themes

Recent market movements have stirred discussions among the investor community. Economic indicators show a mixed bag: inflation is moderating, interest rates remain elevated, and global economic growth presents varied signals. There is also continued focus on the Magnificent Seven and concentration in the large-cap stocks where we see continued multiple expansion and high valuations…oftentimes without the counter-perspective of (1) opportunities in other sectors or asset classes that offered better risk-adjusted returns or (2) hedges against the volatility and high valuations of these leading names. Amidst this backdrop, it's crucial to assess how these factors influence investment strategies with a particular lens to short-term versus long-term gains.

Lessons From the Past

In 2000, the top 20 largest market cap stocks, heavily weighted towards technology and telecom giants like Microsoft, Cisco, Intel, Qualcomm, AT&T, and Verizon, were the darlings of the dot-com boom. However, investing solely in these stocks did not yield market-comparable returns. The bursting of the tech bubble led to a dramatic decline in their valuations, severely impacting performance – so much so that only three (3) companies, including Home Depot, outpaced market returns and nine (9) companies, including Verizon and AT&T, would have left investors with less money today than they started.

While these companies had been market leaders, their high valuations and sector concentration resulted in significant losses for investors who did not diversify. This period underscored the risks of over-reliance on a few high-flying stocks, highlighting the importance of broad market exposure and diversification.

Navigating An Election Year

Generally, the performance of the market in the election year and the year following can be influenced by several factors, including the policies proposed by the candidates, the economic context, and the overall political climate.  While there is some historical evidence suggesting trends in market performance based on the party of the president-elect, it's crucial to consider that other factors, such as global economic conditions, fiscal policy, and geopolitical events, also play significant roles in influencing performance.

As we look ahead, there are (1) components of the market that will stand to benefit regardless of the winning party and (2) other areas that will be positively or negatively impacted depending on how the presidential and other elected officials govern.  As policymakers share their plans for the future, it’s important to remember that the impact on the markets is oftentimes overblown since the election itself does not guarantee implementation of a stated agenda.  

Since corporate taxes may be the most significant short-term political factor affecting stock prices, it’s important to understand both candidates’ proposals.

•    Donald Trump: Donald Trump’s plan calls for a tax reduction for corporations from 21% to 15%.  It also considers continuation of prior “Bonus Depreciation” tax breaks which essentially allow companies to bring down their effective tax rate even further.   These types of tax breaks had the largest impact on the Utilities, Consumer Discretionary, and Consumer Staples industries during Trump’s last presidency.

•    Kamala Harris:  Kamala Harris’s plan calls for a tax increase for corporations from 21% to 28%.  Part of her plan also focuses on raising the buyback tax rate from 1% to 4% which could impact firms like Apple, Google, and Meta that run extensive buyback programs – where some might find it more advantageous to increase dividends versus buybacks.  Firms already paying close to 28% corporate tax rates would be less impacted while many of the sectors that saw gains after changes to the 2017 tax code could stand to lose more.

A Balanced Approach to Investing

Given the limitations of various market ratios (e.g., CAPE), historical studies, and other indicators to articulate the market value, at PFP, we believe it’s crucial to adopt a comprehensive investment strategy.  Here are some key considerations we factor in our investments as we navigate these times: 

•    Diversification: We spread investments across various asset classes and geographies to mitigate risk and capture potential growth in different sectors.

•    Fundamental Analysis: We assess individual investments based on their own merits, including company fundamentals, competitive positioning, and industry trends.

•    Long-Term Perspective: We maintain a long-term investment horizon. Short-term market fluctuations are often less impactful when viewed through a longer lens.

•    Adaptability: We are prepared to adjust our investments based on changing economic conditions and emerging trends. Flexibility helps us navigate market volatility and capitalize on new opportunities.

 If you have any questions or wish to discuss how current market conditions might impact your investments, please do not hesitate to reach out. We are here to help you navigate these uncertainties with informed and strategic decisions.

 The Office of the Chief Investment Officer