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.

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 to chat.

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.

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

January 1, 2023: An Important Year for Professional Guidance

The past year was a rough one. Stocks of the S&P 500 were down -18.1%, the third worst year of the past 40 years. Bonds also posted losses. The Bloomberg Aggregate Bond Index had its worst year since it began in the 1970s, down -13.0%. The 10-year U.S. Treasury bond (-16.3%) saw its worst annual performance ever (dating back to 1928).

To add insult to injury, both stocks and bonds were down at the same time. That’s happened only three times in the past century.

Yet it was also a year in which positioning and defensiveness were key. Value stocks—which typically pay higher dividends, have lower prices relative to fundamentals, and are of higher quality—had their best relative year since 2002. The Dow Jones Industrial Average (-6.9%) and the Russell 1000 Value (-8.1%) outperformed the market and protected value in an otherwise dismal year. For investors with energy and consumer staple stocks, performance was even better. Likewise in bonds, shorter-term indices held up better than riskier peers. The Bloomberg 1-3 year Credit Index was down a manageable -3.8%.

In 2023, we again expect inflation, the Federal Reserve (Fed), and economic worries to dominate the narrative. The Fed is balancing a slowing economy against the need to stamp out inflation. Chairman Powell indicated that the pace of rate increases will slow, which should take some of the pricing pressure off of bonds, possibly making them more defensive in 2023. With interest rates at higher levels, bond coupons are providing better income opportunities (this is happening fastest for short- maturity bonds, which have been our focus).

In stocks, we continue to use the selloff as an opportunity to look for high-quality companies at bargain prices. We tilt toward funds with an emphasis on companies that can stand the test of time, through full market cycles and beyond.

Data sources: Koyfin, Black Diamond, NYU Stern School of Business, Allied

October 1, 2022: This is the Market Doing Its Job

The market is again testing its lows at quarter-end. After a strong summer rally, the market sold off in August and September. Hopes for a recovery were dashed when the Fed confirmed in August that they would work to tame inflation, even if it meant pain for the economy. As of quarter end, the S&P 500 was down over 23% this year.

Avoid the “bear trap”

Bear markets play out over time. Everyone worries about the quick, sudden drop-like Black Monday in October 1987. But a typical bear is one of new lows, then a rally, followed by a retest of the low until the market finds equilibrium. A recent analysis shows an average of 6.5 “bear trap” rallies in past bear markets-rallies that end up being false breakouts.*

This pattern can be maddening for novice investors. As the market starts to rally, the fear of missing out causes many to become more aggressive. A quick downward reversal makes them scramble to a more conservative stance, leaving them always chasing the market. This is the market doing its job-shaking out investors who haven’t done their due diligence.

Focusing on quality

Instead of chasing the market, we look for funds invested in companies with the defensiveness to survive a bear market, the fundamentals to grow over a full market cycle, and valuations that provide a margin of safety. When these quality companies go on sale, we buy. We’re not lured by companies at euphoric valuations. We harbor no illusions that we can time the market-catching the bottom or selling at the top.

What we can do is own a quality portfolio designed to handle a bear market and that has the potential to outperform over a full market cycle. We’re confident that’s how we’re positioned today.

*”What’s a ‘bear trap’? Analysts issue warning not to get swept away by the recent market rally,” Fortune, August 23, 2022.

Data source: Bloomberg

Past performance is no assurance of future results. DMKC Advisory Services, LLC (“DMKC”) is a registered investment adviser with its principal place of business in the State of Iowa. DMKC and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which DMKC operates. DMKC may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This communication is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by DMKC with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of DMKC and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of DMKC please contact DMKC at (515) 221-1133 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about DMKC, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 515-221-1133. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by DMKC staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.