Informed decision-making is the cornerstone of successful investing. That’s why we at DMKC Advisory Services provide insightful, quarterly briefings on the latest trends and developments in the economy, the markets, and more. These updates are designed to help our clients understand the opportunities and risks in the current environment—and how we help their investment strategies adapt.

We invite you to reach out to us for more information or personalized investment guidance. Contact us at any time with questions.

January 1, 2025: Reassessing the Market—and Your Comfort with Risk

The stock market has been on an amazing run. Over the last 15 years, the S&P 500’s average annual return was in the mid-teens, well above its long-term average of around 10%. The last two years extended this climb, leaving most major indexes near all-time highs.

Greed Is on the Rise

Signs of euphoria have emerged. Valuations are stretched, with the market trading at over 28 times trailing earnings versus a long-term average of 18 times. After the election, just eight stocks accounted for 85% of the market’s increase in November and December, while the other 492 members of the S&P 500 did little to help performance. If you weren’t in the eight BATMMAAN* stocks, 2024 may have ended on a sour note.

Not surprisingly, we don’t think chasing returns is a good idea. As Warren Buffett quipped, “be greedy when others are fearful and fearful when others are greedy.”

Review Your Risk Tolerance

With signs of greed in everything from AI stocks to bitcoin, now is a good time to reassess your risk tolerance. An average bear market for stocks is a -34% drop, with the full bear cycle lasting on average 35 months. If your stock investments fell by this amount, would it affect your ability to sleep at night? If so, it may be time to reassess your allocation between stocks and bonds (we can help).

We See Opportunities

Even with euphoria in some sectors, we still see opportunities. There are attractive valuations in health care, industrials, consumer staples, and energy. While these industries may not have the growth prospects of some technology names, they have defensive characteristics should the market decline, they pay solid dividends, and many of their valuations are one-half or even one-third the general market.

We're always happy to discuss your portfolio, your goals, or our investment philosophy. Contact any of our team members at 800-998-9773 to set up a meeting.

Data Sources: Koyfin, Shiller Online Data Set, FRED, S&P Global, MarketWatch, Allied

*The BATMMAAN stocks are: Broadcom, Apple, Tesla, Meta, Microsoft, Amazon, Alphabet, and Nvidia

October 1, 2024: A Soft Landing?

So far this year, markets rose on the narrative that we’re on course for a soft landing. Inflation continued to moderate, with the consumer price index (CPI) down to +2.5% year-over-year—closing in on the Fed’s 2.0% target. Unemployment rose to 4.2% from 3.4%. While still a low absolute level, there’s some concern that the upward trend may indicate a weakening employment picture.

The Fed cut the overnight rate by 0.50% in September, as they feel inflation has made further progress toward their target. The market expects the Fed to continue cutting rates in the coming months.

Both stocks and bonds are up

Stocks are up, with most of the major indexes in the upper teens to low twenties percentage gains. The technology sector (+30.3%) continues to do well, but not as well as the often boring (but defensive) utilities sector (+30.6%), which is surging on rising energy demand from artificial intelligence (AI).

Bonds are up as interest rates fell (there’s an inverse relationship between bond prices and interest rates). After being at or near 5% earlier this year, much of the Treasury curve is now in the mid 3s, with the two-year at 3.62% and the 10-year at 3.77%. For investors who took advantage of higher cash and T-Bill yields, things are starting to change. You may want to review your positioning.

We prepare for good times and bad

Will the Fed engineer a soft landing for the economy? Or is the weakness in employment the beginning of an economic downturn? We’ve worked to position portfolios for either scenario—quality value stocks with price recovery potential in a strong economy but with the defensiveness and low volatility to do well in a market pullback.

Of course, the election looms in the coming weeks. We’re comfortable no matter the outcome thanks to the quality and positioning of our portfolios.

Contact us with questions

We’re always happy to discuss your goals and answer your questions. Just call us at 800-998-9773.

Data Sources: Koyfin, FRED, S&P Global, Black Diamond, Allied Calculations

July 1, 2024: It’s Halftime

In the first half of the year, markets rose—with the S&P 500 and Nasdaq both gaining more than 10%. But it was an incredibly narrow market.

Nvidia (NVDA), the poster child of the artificial intelligence (AI)-led rally, accounted for roughly one-third of the S&P 500’s return. Without NVDA and its AI peers, most stocks aren’t rallying. The S&P 500 Equal Weight Index, which shows how the average stock in the index is doing, is up a modest 4.1% through June.

We know enough market history to not get caught up in the euphoria. From the Nifty-Fifty of the 1970s to the late 1990s Tech Bubble, these cycles have a way of coming undone—often in devastating fashion. The Nasdaq fell -78% when the Tech Bubble popped in 2000 and -60% in 1974 after the Nifty-Fifty peaked.

We invest for the long term

Valuations matter. While the big tech names trade at over 30x earnings, the rest of the market trades at a somewhat reasonable 18x earnings, providing a margin of safety.

We’re comfortable with the long-term prospects and defensiveness of our more conservative, blue chip-focused holdings. Low-volatility strategies like ours have a history of shining during bear markets.

What to watch in the second half

As we head into the back half of the year, a couple of big events are on the horizon:

• Interest rates: The Federal Reserve (Fed) is hinting at making at least one rate cut before year-end. Will this dovish step keep the market rally going or cause a second wave of inflation?

• The presidential election: The market may see more volatility heading into November’s election. Contrary to popular opinion, historic data says the market impacts politics more than the other way around. People vote their pocketbooks—so as the election approaches, you may want to watch the market instead of the polls.

Contact us with questions

We’re comfortable with the quality and positioning of our portfolios, no matter what the market throws at us. If you have any questions, please call us at 800-998-9773.

Data sources: Koyfin, FRED, Barrons, Yardeni Research, S&P Global Markets, Allied Calculations

April 1, 2024: Keeping an Eye on the Horizon

The stock market rallied in the first quarter, fueled by a healthy economy, easing inflation, and excitement around artificial intelligence (AI). Even amidst this sunny market, however, we always keep a watchful eye for storm clouds.

Watching for risks

With that in mind, here are the primary risks we see on the horizon:

1. An AI frenzy: There are signs of euphoria in certain technology sectors. Anything related to AI is being bid up, with some companies trading at price-to-sales ratios of over 30 times. Historically, such exuberance led to sharp corrections, such as the NASDAQ’s -77.9% plunge when the tech bubble burst in 2000. It took 15 years for the NASDAQ to recover its 2000 peak.

2. A slowing economy: Potential early signs of an economic slowdown, including rising unemployment and deteriorating consumer confidence, need to be monitored. Unemployment ticked up to 3.9%, which is still low but moving up.

3. A second wave of inflation: While inflation is continuing to trend down, many price trends remain sticky and could reaccelerate—similar to the second wave of inflation in the 1970s.

4. The election looms: Regardless of your political affiliation, elections bring the one thing markets hate—uncertainty. Watch for increased volatility as we approach November.

Investing for risk-management and growth potential

Thankfully, we see a solution that addresses all of these risks: low-volatility, high-quality value stocks. As a group, they’re trading at a discount to the broader market and offer several advantages, including:

• Defensiveness in downturns (low-volatility stocks walked right through the tech bubble burst in 2000)

• Steady year-on-year growth

• Built-in inflation hedges (pricing power, commodity reserves, etc.)

Our portfolios tilt toward these stocks to hedge against the risks while still offering steady growth. If you’d like to discuss this strategy or anything else related to your investments and financial goals, please call us at 800-998-9773.

Data sources: Koyfin, FRED, S&P Dow Jones Indices, Allied Calculations

January 1, 2024: What a Difference a Year Makes

In late 2022, after a bruising year for the market and the economy, 85% of economists expected a recession in 2023. That recession never came. As inflation moderated and employment remained healthy, the stock market rallied. Most of the major indexes have now recovered their 2022 losses and are challenging all-time highs.

As a result, the market began 2023 with extreme pessimism and enters 2024 with extreme optimism. Today, 53% of investors surveyed by the American Association of Individual Investors are “bullish.” That 53% figure may not sound like a lot, but it’s a level that’s rarely reached. Over the last 10 years (520 weeks), the weekly AAII survey only hit this level seven times—so investors have only been this optimistic 1% of the time.

As we’ve all seen this past year, the market bounces around unpredictably. That’s why we focus on the underlying companies in our portfolio. When we dig in and look at the durable competitive advantages and steady growth of many of these companies, we’re comfortable no matter the economic environment. Over time, slow and steady often beats the general market—and helps to protect investors from the risks of volatility.

As we enter a new year, tax season will soon be here. Expect to see your retirement account tax documents in late January. 1099’s for brokerage accounts are distributed in late February. If you’d like to start planning for 2024, including (if applicable) IRA required minimum distributions, please contact us. And as always, we’re happy to go into more detail on your portfolio, financial goals, or our investment philosophy. Contact us at 800-998-9773.

Data sources:  Financial Times poll, December 2-5, 2022, AAII sentiment survey 12/21/23, Koyfin, Allied Calculations

October 1, 2023: Opportunities Abound for Diversified Portfolios

For the first time in years, there are opportunities across the investing spectrum:

• Thanks to the Fed’s campaign to stomp out inflation, short-term rates are at their highest levels in 16+ years. From 2009 to 2021, the 30-day Treasury Bill (a proxy for cash) had an average yield of just 0.4%. Today, the 30-day T-Bill yields 5.4%.

• Bond yields are also on the rise. We’re in a unique situation in which short-term yields are higher than longer-term bonds (called an inverted yield curve). But we’re still seeing the highest bond yields since 2007.

• There are also opportunities in the stock market. We talked last quarter about the market’s bad breadth—how a small subset of highly valued companies accounts for most of the market’s gain. If you look outside that group, you can find high-quality stocks at reasonable (or even cheap) valuations. For example, while the technology sector rose over 30% this year and trades at an ever-higher valuation, the utilities sector is down 14% with an attractive valuation and above-market dividend yield.

Rate hikes slowing down

Although there may be more rate hikes on the horizon, it seems likely we’re closer to the end of the Fed hikes than the beginning. And historically, following the end of a rate-hike cycle, short-term CDs and cash tend to underperform relative to other investment opportunities—especially stocks. That’s why even with the best cash and bond yields in years, a diversified portfolio still makes sense. Cash, after all, has a questionable record of keeping pace with inflation.

Diversify for growth potential

To outpace inflation and provide growth for the future, your portfolio should continue to include a diversified mix of stocks, bonds, and a cash safety net. We would be happy to connect with you to ensure your portfolio has the proper balance of each and is aligned with your risk tolerance and financial goals. To get started, contact us at 800-998-9773.

Data sources: Koyfin, Charles Schwab, Ibbotson SBBI data, Allied Calculations, Bloomberg

July 1, 2023: A Case of Bad Breadth

The market had a good first half of the year, rebounding off last year’s lows. The S&P 500 is up over 20% from its October 2022 low, which means we've entered a new bull market. But we're still -7.2% below the all-time-high of January 2022.

Despite the strong first-half performance, however, the market had a case of bad breadth. A small group of large tech companies spectacularly outperformed the index, while the majority of stocks underperformed. In fact, the “Magnificent 7” accounted for almost all the market's gain: Microsoft (MSFT +42%); Apple (AAPL +49%); Alphabet (GOOG +36%); Meta (META +140%); Amazon (AMZN +56%); Nvidia (NVDA +191%); and Tesla (TSLA +129%).

An alternative measure of the performance of the market as a whole can be seen in the S&P 500 Equal Weight Index. This index, which weighs each of the 500 components equally instead of by market cap, was up a more modest +6.0%.

Reasons to remain on the defensive

While the technology sector rallies on hopes of artificial intelligence (AI)-led growth, there are enough economic red flags to keep our portfolios focused on high-quality, defensive holdings. The yield curve is inverted, with short rates higher than long-term rates. That’s a signal of falling interest rates (historically a recession indicator). Other metrics—like sticky inflation, a hawkish Fed, rising initial unemployment claims, and the market's bad breadth—also give us concern.

Opportunities are there

That said, we don't think investors should move to the sidelines. In fact, we're excited about the opportunities in this market. Excluding the tech sector, the S&P 500 trades at 17 times earnings—in line with long-term averages. And with a little digging, we think we've found even better values—in names with solid dividends, defensive balance sheets, attractive valuations, and good long-term prospects.

Data sources: Black Diamond, Koyfin, Yardeni Research, Allied

April 1, 2023: A Quarter That Made the Case for Quality

The stock market had a relatively quiet first quarter despite the second- and third-largest bank failures ever throwing a wrench into the marketplace. While other markets, like bonds, reacted quickly to the bank failures, the S&P 500 seemed to brush the worries aside, ending the quarter up over 7%. Leading the market higher are last year’s underperformers - companies in the technology and consumer discretionary sectors.

Is the bear market of 2022 over, or is this a “dead cat bounce”—a temporary recovery in share prices after a substantial fall? The short answer is we don't know—and neither do the pundits trying to tell you they do. What we do know is that a portfolio of high-quality companies looks attractively priced versus many of the more volatile, higher-risk names. The risk/reward balance, in our opinion, continues to favor more conservative holdings. While we may not fully participate in market rallies, we are comfortable taking a slow and steady stance versus the more volatile approach.

Although the stock market has been uncharacteristically calm, that wasn't the case for bonds. The failure of Silicon Valley Bank sparked a flight to quality. Investors, worried about the safety of their deposits, rushed into U.S. Treasury bonds, pushing yields down. The two-year Treasury peaked at 5.05% in early March but ended the quarter at 4.06%—a drop of more than a full percentage point in just a few days’ time. While this is making bond holdings look better (bond prices rise when yields fall), it shows there is still a lot of risk in the economy.

Data sources: Black Diamond, Allied Calculations, Bloomberg