Q1 2025 Investment Commentary: Diversification Results in Smoother Ride than Headlines Portray

Contributed by: Angela Palacios, CFP®, AIF®

Contributed by: Nicholas Boguth, CFA®, CFP®

The past few months have been a whirlwind—new leadership in Washington, escalating trade tensions, geopolitical conflicts, and market swings have dominated headlines. Even the Federal Reserve noted heightened 'uncertainty' after holding the Fed Funds Rate steady, and that might be an understatement.

The S&P 500 started out steady this year, gaining a few percent by mid-February and reaching a new all-time high! But the short-term whims of the stock market turned from that point as it fell sharply and briefly hit a 10% decline from its peak by mid-March (those famous "Magnificent 7" stocks got hit even harder, the notable one being TSLA that was down a whopping 53% from its high a few months prior). The S&P 500 ended at -4.5% this quarter.

While all that turmoil was occurring in the big U.S. stock names, international stocks were quietly having a fantastic quarter. The MSCI EAFE (a common stock index covering international stocks) was actually positive for the entire quarter, outperforming its U.S. counterpart by over 16% at times and ending the quarter at a positive +8%.

Bonds also did their job and provided the support we want to see during times of volatility, the Bloomberg U.S. Aggregate Bond Index added +3%.

If you were just watching the headlines, it may not have felt this way, but all of that adds up to a balanced portfolio* being essentially flat to start the year. U.S. stocks dragged down performance, while bonds and international stocks were additive. Our ultimate goal has always been to help you achieve your goals; therefore, we continue to focus on the risk reduction benefits of a diversified portfolio, and so far this year, the benefits of diversification have added up to a smoother ride.

*Morningstar's Moderate Allocation category average for the quarter was -0.3%.Source: Morningstar Direct.

Diversification

It is quarters like this that remind us why we invest in diversified portfolios and create a plan BEFORE there is market volatility.

Famed Nobel Laureate Harry Markowitz, whose investment principles still shape how portfolios are created today, said, "Diversification is the only free lunch in investing." We tend to agree, which is why we strongly believe in diversified portfolios. The only pushback I'd give is that it isn't "free"; it is actually very difficult for most investors to stay diversified. The hard part is that there is always a piece of your portfolio lagging, tempting you to second-guess it. Lately, that's been international stocks—but those who stayed the course just reaped the rewards of a quarter where international outperformed by more than 10%. Over the long haul, we believe diversification leads to favorable outcomes for investors, and we will continue to allocate accordingly.

Trade War Deja Vu

With all of the recent volatility directly induced by the trade war escalation, we have to look backward before deciding what, if anything, to do with portfolios. The most recent time period we have to look at from history is President Trump's first term when he tackled international trade, starting in late 2017 and continuing through into 2019. You can see that as various headlines escalated throughout the year, the market (the gray area) reacted mildly at first and even continued to climb higher through the summer as the war escalated. It is also important to remember that the volatility late in 2018 was not simply induced by the trade war. At the same time, the Federal Reserve (The Fed) took a tighter policy stance, increasing interest rates and giving forward guidance that it would continue to shrink its balance sheet.

The difference this time is we have lived through this before, so markets are reacting poorly and more quickly than they did before. Perhaps because they are remembering what happened in 2018 and the volatility we saw at the end of the year was still fresh in investors' minds. What is lacking in all commentary we read, though, is experts and investors forget we had a HAWKISH Fed that was raising interest rates then. Now, we have a Fed that is expected to cut rates later this year.

How We Are Trading It?

As we have warned previously, media headlines are often wrong or sensationalized. But this doesn't mean that we ignore them and what is happening. As an investment committee, we digest and step back to calmly make decisions when warranted. So, what have we been up to?

1. Taking profits in positions that have been big winners. This may look different depending on what stage of life you are in and your portfolio needs, but for all, regardless of stage, it's called rebalancing. Rebalancing isn't just a process, it can also be a very tactical tool. We have let our winners run for a long time; once they were overweight, we shifted from US Large cap to areas like bonds (big winners recently) and into areas that underperformed for years like international (also big winners recently). This was done much nearer the market top for US Large before the recent volatility occurred.

2. Lengthening duration in our bond portfolio now that intermediate term bonds are yielding more than short duration bonds. We harnessed that higher yield for your portfolio. Not to mention, some great price performance induced by market volatility recently too.

3. Raised cash for those in withdrawal stage. We did this early this year before the drawdown started. Taking advantage of a good start to the year for markets, we made sure people taking withdrawals had ample cash to fund future withdrawals, getting to sell while markets were up rather than being forced to sell down the road into weaker markets if they continued.

Remembering that portfolio management is not an "all or none" process is crucial. It is about positioning yourself to minimize emotional decisions so you can find the "opportunity" that exists in crisis. Stay tuned for more change to come in portfolios as we assess the consequence of tariffs, especially reciprocal tariffs, being put into place!

If you have questions, it is important that you reach out to your advisor.  We recommend stepping back to remember your investment goals and ask yourself if those have changed. Remember, when we are doing your planning work, we expect times like this to occur, "when, why, and how much" are the surprise but not the "if."  Our planning work knows this volatility occurs and builds cushion into your plan to be able to help manage periods like this.

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Any opinions are those of the Angela Palacios, CFP®, AIF® and Nick Boguth, CFA®, CFP® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Magnificent Seven are a group of companies including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. Raymond James makes a market in these stocks. This is not a recommendation to purchase or sell the stocks of the companies mentioned.

What to Expect Every Day in the Stock Market

Contributed by: Nicholas Boguth, CFA®, CFP®

I’ve written about expectations before, but I wanted to revisit the topic after a volatile day in the stock market this past January.

There was a headline that shook up the tech space, and when you opened a financial news website or turned on your TV – the headlines and reactions made it seem like we were entering the next financial crisis. I checked the markets to see what the damage was, and to my surprise, the S&P 500 was only down -1.46%! Sure, some stocks were down big, but the overall market was mixed. The Dow Jones Industrial Average was actually positive on the day, most bonds were positive, and international stocks were only down slightly. It was a volatile day in the markets, but nothing like the media was portraying.

It reminds me of the quote, “Happiness = expectations minus reality.” We often cannot change reality, but we CAN make sure we have realistic expectations. So, what expectations SHOULD we have for daily stock market moves?

Here’s some historical data on the S&P 500 for the past 40 years.

• Worse than a -1% day: 1191 times, ~30 times per year, or ~2-3 times per month.

• Worse than a -2% day: 350 times, ~9 times per year, ~2-3 times per quarter.

• Better than a +1% day: 1350 times, ~34 times per year, or ~3 times per month.

• Better than a +2% day: 306 times, ~8 times per year, or ~2 times per quarter.

So when the media talked about a -1.46% day like the world was ending, I found some relief in the data and the ability to say, “This might be big news, but a market move like this happens a couple of times per month.” It isn’t consistent, as you can see from the second chart. Some years give us more large down days than others, but that is part of the risk we accept when investing in the stock market. No risk, no reward!

There is noise coming at us all the time, which can make it hard to stay committed to our financial plan. The louder the noise, the more we might be pressured to do something-anything! But in an ideal world, our portfolio and financial plan are set up with the proper expectations so that we see right through the noise and can return to enjoying our life knowing that our financial plan is still on track. Please contact any of us at The Center if you have any questions about your investments or overall financial plan.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation does not ensure a profit or protect against a loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Inclusion of indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transactions costs or other fees, which will affect actual investment performance.

Any opinions are those of Nicholas Boguth, CFA®, CFP® and not necessarily those of Raymond James.

Past Performance Is No Guarantee of Future Results!

Contributed by: Nicholas Boguth, CFA®, CFP®

Over the past year, the S&P 500 has had a fantastic run and was up 38% (10/31/23 to 10/31/24). Does that mean we should expect lower returns in the next 12 months? Absolutely not, at least not for that reason.

Many investors get nervous after a very positive year. You may hear things like: 

• “Stocks have been on a great run, so there is no way this can continue.”

• “Trees don’t grow to the sky!”

• “The past year was well above average; we’d expect mean reversion and lower returns going forward.”

But the truth is, the next year of stock returns has almost nothing to do with the previous year. The chart above shows the last 12 months’ return on the horizontal axis and the next 12 months’ return on the vertical axis. This is monthly U.S. large stock data since 1934 (90 years of data – over 1000 monthly readings!). If higher return years were generally followed by lower return years, you’d see the dots above in a tighter, more downward-sloping line. This is not a tight downward sloping line. This looks like my toddler got excited with a blue marker.

Statisticians call this a “random walk,” but practically speaking, all it means is that negative years can happen no matter what happened last year, and positive years can happen no matter what happened last year!  Past performance is no guarantee of future results. On average, though, we know that the stock market goes up more than it goes down, diversification is key to smooth out the ride, and a well-designed financial plan is the foundation of it all. Please contact any of us here at the Center if you have questions about any aspect of your financial plan. 

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation does not ensure a profit or protect against a loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Inclusion of indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transactions costs or other fees, which will affect actual investment performance.

Any opinions are those of Nicholas Boguth, CFA®, CFP® and not necessarily those of Raymond James.

Q4 2024 Investment Commentary

Click the image above to watch the video commentary!

Contributed by: Angela Palacios, CFP®, AIF®

Contributed by: Nicholas Boguth, CFA®, CFP®

Think back to one year ago. It's January 2024. So far, the economy had avoided the recession everyone thought was coming. The S&P 500 just wrapped up a +26% year. Bonds provided some positive performance. Inflation was coming down, unemployment was still at historic lows, and the mood could be described as cautious optimism as investors expected a "growing but slowing" economy.

Most market forecasts (more on these later) expected 2024 to be good but definitely not great. ESPECIALLY in an election year, because you never know what sort of uncertainty that could bring!

Well, we just wrapped up 2024. How was it? From the lens of the financial markets, it was a strong year.

Stocks continued to climb, and bonds were slightly positive despite some bond market volatility. The S&P 500 was the standout among the major asset classes, but even small cap stocks and international stocks contributed positive performance.

Q4 brought some volatility and uncertainty between a major presidential election and multiple Fed rate cuts. U.S. stock indices climbed through the uncertainty, but international stocks and bonds fell slightly.

The big change during Q4 was the increase in bond yields as investors adjusted to what is looking like an even stronger economy than expected. A stronger economy generally comes with higher bond yields, which means less rate cuts from the Fed. This was reiterated in the Fed's Summary of Economic Projections in December that showed they expected the Fed Funds Rate to get to 3.9% by the end of 2025 (3 months prior, that projection showed an estimate of 3.4%).

We'll be watching this dynamic continue to evolve in the markets this year, but as of today investors are looking at a strong economy backed by an easing Federal Reserve, positive expectations for stock earnings, and decent bond yields providing strong fixed income options.

Interest Rates and The Economy

In December, the Federal Reserve (the Fed) held its final meeting of 2024, finalizing a year marked by significant continued disinflation and one of the strongest in recent years of economic activity. However, uncertainty always remains when looking ahead. Tariff and immigration policies proposed by the incoming administration are clouding investor's (and the Fed's) outlook for 2025.

With the Fed still in easing mode, equities should continue to be well supported (remember the old saying, "Don't fight the Fed"). While the Fed's December rate cut was a 'hawkish' cut (a cut with guidance there will be fewer future cuts), we continue to focus not on the number of cuts but more on the overall economic trajectory, which seems to be very resilient right now. With the economy still showing momentum, earnings should maintain their climb in 2025—reinforcing our positive longer-term outlook. However, in the short term, there can always be volatility, and after such a strong year, a little short-term volatility would not be unexpected.

So why doesn't this potential increased volatility scare us very much? A strong consumer!  Since the consumer makes up 70% of the U.S. Economy, we are a key ingredient to keep an eye on. The strength of the consumer in 2024 was evident through several key indicators. Consumer spending has shown consistent growth, while consumer confidence remains unshaken, driven by low unemployment rates, steady job growth, and rising wages. There could be some cracks on the horizon for consumer spending. We are starting to see consumers "trade down" a bit in their purchases, meaning they are still happy to spend but on cheaper options for goods and services. There aren't so many cracks to be concerned about yet, but it is certainly an area we watch closely.

Bonds have had a bizarre year. Coming into 2024, we weren't sure what to expect other than the unexpected. As such, the caution we have exhibited in that portion of our portfolios has helped reduce some volatility in bonds in 2024. Treasury yields have moved contrary to normal historical patterns by rising instead of falling after the Fed started to cut rates in the fall. Better-than-expected economic data and inflation not falling as fast as the market would like to see have challenged investors to reassess the Fed's expected rate path. This means yields are likely to stay a bit more elevated than everyone originally thought. If you look at inflation and employment, the Fed has largely accomplished what it set out to do, even though markets might like to see them do more. The chart below shows where we are versus the Fed's targets.

S&P 500 Price Targets and Return Expectations

Major banks and brokerage firms put out S&P 500 price targets every year, and it may or may not surprise you, but they are rarely accurate. It is impossible to predict something as volatile as the stock market over such a short time. Last year, for example, analysts ranged from bearish to bullish, and the stock market blew straight through every one of their price targets by May.

Stock performance over one year can vary dramatically, but it has been remarkably consistent over the long term.

The other thing on investors' minds right now is…can the performance continue? Of course it can! No one knows for sure if it WILL over the next year (as I said, it is impossible to predict something so volatile as the stock market over such a short time frame), but just because stocks had a tremendous last year does not mean that they must lag the following year. In fact, the statistics show there is essentially no correlation between last year's performance and the next year's performance.

Election Outcome and Markets

As the election dust settles, it is important to remember that the economy is usually the guiding force behind winners and losers in our portfolio.  Overall, rising corporate profits, continued economic expansion, and the potential for lower yields later this year provide a potentially positive backdrop for the markets, in our view.  Some areas, like international investments, may see additional headwinds from political forces like tariffs or a strong U.S. dollar.  At the same time, smaller companies in the U.S. may see some natural tailwinds from continued onshoring and disinflation. While there are many reasons for an optimistic outlook, being prepared for a downturn is evergreen. Our actions in your portfolio will reflect our continued research and developments in these areas as President Trump takes office. There are important things that we need to focus on, as always, such as making sure that you have 6-12 months of expenses set aside in cash so that we can weather any short-term volatility in markets (especially if you are retired), rebalancing to maintain proper diversification and paying close attention to tax loss harvesting and capital gains. 

A new administration may provide new risks, but when aren't there risks in investing? With new risks also come new opportunities, and our investment committee meets monthly to ensure portfolios are allocated to take advantage of constantly changing markets. Most importantly, your financial planner here at The Center is here to help you build a financial plan that gives you confidence no matter the market conditions. With that being said, onto 2025!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Any opinions are those of the Angela Palacios, CFP®, AIF® and Nick Boguth, CFA®, CFP® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Fed Just Cut Rates (Again) - Do CDs and Treasuries Still Make Sense?

Contributed by: Mallory Hunt

The Federal Reserve’s recent decision to continue cutting interest rates has left many investors wondering about their next moves and how to adjust their portfolios. Safe investment options like Certificates of Deposit (CDs) and U.S. Treasuries remain viable options for conservative investors seeking stability and predictable income. As interest rates fluctuate, it’s crucial to assess whether now is a good time to invest in these types of investments or if other options might yield better returns based on you and your investment goals. Here’s why we think these instruments are still worth considering and how you can make the most of them in the current economic climate. Let’s break it down.

Understanding CDs & Treasuries

*A Certificate of Deposit (CD) is a time deposit offered by banks that typically provides a fixed interest rate for a specific term, ranging from a few months to several years. CDs are considered low-risk investments, often insured by the FDIC up to $250,000 per person on the account, making them appealing to conservative investors.

U.S. Treasuries are debt securities issued by the United States Department of the Treasury to finance government spending consisting mainly of Treasury Bills (short-term securities that mature in one year or less), Treasury Notes (medium-term securities that mature in 2 to 10 years) & Treasury Bonds (long-term securities that mature in 20-30 years). They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. Government.

Why CDs Are Still a Good Investment

Despite the rate cuts, CDs continue to offer several benefits for conservative investors:

1. Safety and Predictability: CDs provide defined income over a fixed term. If you’re risk-averse or looking to preserve capital, CDs can be a stable option, even in a lower-rate environment.

2. No Market Volatility: Unlike stocks or bonds, CDs are not subject to market fluctuations, making them a reliable choice for those who prefer to avoid risk.

3. Potential for Laddering: With a lower interest rate environment, you might consider a CD ladder strategy, where you stagger the maturity dates of multiple CDs. This allows you to take advantage of potential future rate changes while still securing some cash in safe, interest-bearing accounts.

As with any investment, what may be suitable for one investor might not be ideal for another. CDs do come with their own set of limitations such as potential liquidity constraints (tying up your funds for a predetermined period) or risks related to reinvestment and interest rates. It is crucial to be thoroughly informed on both the advantages and disadvantages of any investment before making a commitment.

The Appeal of U.S. Treasuries

U.S. Treasuries are another safe haven for investors, especially during periods of economic uncertainty:

1. Government-Backed Security: Treasuries are backed by the full faith and credit of the U.S. government, making them one of the safest investments available.

2. Variety of Options: Treasuries come in various maturities, from short-term bills to long-term bonds, allowing you to tailor your investments to your financial goals.

3. Interest Rate Sensitivity: While treasuries’ yields may decrease following a rate cut, they often perform well during economic downturns as investors seek safe assets.

While the recent rate cuts may have reduced the yields on CDs and Treasuries on the front end of the curve, these instruments still offer valuable benefits for conservative investors. In fact, yields on CDs & Treasuries with longer maturities have actually INCREASED since The Fed began their rate cutting cycle. By employing strategies like laddering and diversification, you can navigate the changing interest rate environment and continue to achieve your financial goals. Keep an eye on economic indicators and remain flexible; the investment landscape can change quickly, and adapting your approach can lead to better outcomes. As always, consult with a financial advisor to tailor your investment strategy to your unique situation. Whether you choose CDs, Treasuries, or explore other avenues, making informed decisions is key to achieving your financial goals.

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

*Raymond James Financial Services, Inc., is a broker-dealer, is not a bank, and is not an FDIC member. All references to FDIC insurance coverage in relation to Brokered CDs and/or Market-Linked CDs address FDIC insurance coverage, up to applicable limits, at the insured depository institution that is disclosed in the offering documents. FDIC insurance only covers the failure of FDIC-insured depository institutions, not Raymond James Financial Services, Inc. Certain conditions must be satisfied for pass-through FDIC insurance coverage to apply.

Yield Curve and Forward Returns

Contributed by: Nicholas Boguth, CFA®, CFP®

In 2022, there were fear-inspiring articles about the yield curve inversion. Two years later, we’re seeing the same kind of articles about the yield curve UN-inversion! It can’t be both…can it?

Let’s look back at the last 50 years of inversions and un-inversions and see if either has been a consistent signal for the stock market*.

*Source: Morningstar Direct. Performance = S&P 500 TR.

*Source: Morningstar Direct. Performance = S&P 500 TR.

Do those results surprise you? On average, returns look BETTER after inversions AND un-inversions. That headline doesn’t grab as much attention as one that provokes fear, though.

It is hard to filter out the noise when it is so prevalent in our daily lives. We listen to the noise but rely heavily on the data when making decisions in our investment process. If you have questions about your portfolio, please don’t hesitate to reach out.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Any opinions are those of Center for Financial Planning and not necessarily those of Raymond James.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

Q3 2024 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Contributed by: Nicholas Boguth, CFA®, CFP®

This year has been off to a solid start as the melt-up continues. Even during what is usually the worst performing month on average, September, markets rallied. Mega-cap US tech stocks have remained a standout this year again and have driven much of the returns for the S&P 500 for the first half of the year. But, since then, we have seen participation from other areas of the market, such as international, particularly emerging markets, and small company stocks that have made a strong showing since interest rate cuts were back on the table and inflation continued to abate. Bonds have been positive by about the interest they have paid this year, and the Federal Reserve has started to cut interest rates with a .5% cut in September. Interest rate expectations and inflation news have been the major drivers of market returns so far this year. You may have noticed that I have left the election out of this list because the election hasn’t really driven market volatility so far. If you want to learn more about the relationship between elections and markets, check out a replay of our webinar from last month!

As we approach election day, the headlines could potentially drive some short-term volatility and, certainly, our emotions, but historically, long-term markets are driven far more by factors like economic growth, Federal Reserve direction, and fundamentals like growth and valuation. It is very likely that the outcome of the election won’t be settled by the time we wake up the next day, so this could possibly cause some short-term volatility, but we wouldn’t expect this to be sustained. A last note on politics: it is worth mentioning that Congress averted a government shutdown through the passage of a stopgap bill to fund the government through December 20. At that time, we could possibly see some political posturing surrounding this topic again, so we expect to see more headlines surrounding this late in the year. Markets tend to shrug off these headlines as we have “been there, done that” many times before.

GDP

Since the economy is a bigger driver of long-term returns, we should check in on this. As you can see from the chart below, the Federal Reserve seems to be engineering this soft landing they were hoping for.  Inflation and wages continue to come down, unemployment has grown slowly this year, retail sales have slowed a bit, and GDP shows a slowing in this chart but has since had somewhat stronger readings as the year has gone on.

Sources: Bloomberg, Bureau of Economic Analysis, Bureau of Labor Statistics.  Data as of 29 March 2024 for GDP and 31 May 2024 for other statistics.  Retail sails = adjusted retail and food services sales.  Wages = average hourly earnings.

Interestingly, Economic data is almost always revised after the fact. Data points such as how many people in an entire country are looking for jobs, how much money every citizen in a country has earned/spent/saved, or how much the prices of everything in a country have changed – these are pretty hard to track. This quarter, the Bureau of Economic Analysis revised GDP upwards by .3% in 2021, .6% in 2022, and .1% in 2023. Turns out we (consumers) spent more money than previously calculated in the past few years. Remember when we had two negative quarters of GDP growth in early 2022 (which is the technical definition of a recession), but a recession was never declared? Now, with revisions, there weren't actually two negative quarters of GDP growth. The 2nd quarter of 2022 was revised into positive growth rather than negative growth.

Headlines and Inflation

Inflation is still under the microscope despite the Fed shifting gears from the past couple of years' rate-hike environment into the rate-cut environment it has established going forward. The market will likely be watching economic data as it rolls in and reacting accordingly, as it weighs the odds of increasing inflation (and the potential reaction of the Fed moving slower with its rate cuts) OR continued disinflation/deflation (and the potential reaction of the Fed moving faster with its rate cuts). Recently, there have been some headlines of OPEC increasing oil production, which could possibly put downward pressure on oil prices. At the same time, strikes are beginning at ports on the East Coast, which could potentially slow down supply chains and put upward pressure on prices.

Yield Curve UN-Inversion

About two and a half years ago, the yield curve inverted. You can see this in the chart below, with the blue line dropping below 0 (meaning short-term rates are yielding greater than long-term rates).  We wrote about it then and shared that despite the warning sign – stocks still were positive a majority of the time 1 and 2 years later. 2022 was a rough year for both the stock and bond markets, but here we are 2.5 years later, and the S&P 500 is back, making new all-time highs.

Source: https://fred.stlouisfed.org/series/T10Y2Y

Last month, the yield curve UN-inverted (see that blue line above moving back above 0). You may have seen news articles directing attention to THAT event as the event that typically precedes recessions. It is hard to focus on the signal over the noise when the noise is so loud in our daily lives, from 24/7 media coverage to daily newspapers and endless social media feeds, but looking back on the last ten times, the yield curve UN-inverted:

• 8 out of 10 times, the S&P 500 was higher the next year.

• 10 out of 10 times, the S&P 500 was higher ten years later.

Source: Morningstar Direct. S&P 500 TR (USD)

So, what does this mean for your portfolio?

After this first rate cut by the FED, the yield curve UN-inverted AND it is looking like the FED has successfully engineered a soft landing. History can generally be a useful guide to understand how different assets (beyond just US Large cap) performed in this time period. Typically, you see risk assets doing well for equities, while in fixed income, quality tends to shine. Certain asset classes may have a little more tailwind behind them because of starting valuations and a scenario layered in where we have had high but falling inflation, so while the outcome may rhyme, it probably won't be identical to below.

Emerging Markets

Emerging markets made some noteworthy moves recently. Outside China, India, and Taiwan are experiencing excellent performance driven by monetary policy easing and their technology sectors. However, China has had some significant developments, causing them to play a bit of catchup recently. Chinese leaders announced several monetary policy initiatives that drove their recent equity return spike. First was a 50 basis point (bps) cut to the reserve requirements (the amount of cash that banks must hold in reserve against deposits). Second, they cut existing mortgage loan interest rates by 50bps. Other initiatives were also put into place to kickstart their economy. While the path forward could be bumpy, several factors remain a potential tailwind, such as reasonable valuations and company fundamentals and easing monetary policy.

Small Cap Stock Performance

Small cap stocks have been lagging their large cap counterparts for most of the last decade, but this quarter we saw one of the biggest moves in recent history from the asset class. Early in the quarter, there was a huge divergence, and small cap stocks provided a boost to portfolios. The Russell 2000 index ended the quarter +9.3%, beating out the S&P 500 index that was only up +5.9%. Many attributed the outperformance to the market reacting to a potential lower interest rate environment as it looked more certain that the Fed would be cutting rates, the cheaper starting valuations of the small cap asset class, and the overall higher volatility expected from the smaller and less liquid stocks. Whatever the catalyst was, many investors who have been waiting a long time for small cap outperformance were rewarded this past quarter.

While most of us invest with an eye years or decades into the future, short-term market swings can still trigger strong emotional reactions and sometimes push normally calm investors to become short-term traders rather than long-term investors. A properly allocated portfolio and enough cash to fund short-term needs can help to allay an emotional response that might derail your long-term plan. Is your portfolio appropriately positioned for your situation? As always, we are here to help!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Any opinions are those of the Angela Palacios, CFP®, AIF® and Nick Boguth, CFA®, CFP® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Mutual Funds vs. ETFs – What’s the Difference?

Contributed by: Nicholas Boguth, CFA®, CFP®

At the highest level…not much! Mutual funds and Exchange Traded Funds are two common types of investments that group individual securities together into a neat package to make it easier for us investors to build our ideal portfolios.

The difference between mutual funds and ETFs shows up more when you dig into the details of their liquidity, tax efficiency, costs, and transparency (more information on each difference is at the bottom of this post for anyone looking for the specifics). ETFs do have some structural benefits compared to mutual funds, which has led to their faster growth over the past decade, but the total assets invested in ETFs are still less than half that of mutual funds.

I buried the specifics at the bottom of this post because, for most of us, ETFs and mutual funds can be used interchangeably to reach our investment goals. In fact, some companies offer the exact same investment product in both fund structures.

The major question: "Which is better?" If only it were that easy…

ETFs do have a handful of advantages compared to mutual funds. Two of the most significant advantages are that they are often cheaper and more tax efficient. But like all things in investing, the best answer is…"It depends." Here are some examples where you might lean towards a mutual fund compared to an ETF: sometimes mutual funds ARE cheaper, or maybe you want to invest in a portfolio manager who doesn't offer an ETF, or perhaps you believe an asset class is better served by the mutual fund structure than the ETF, or you are holding a mutual fund in a taxable account and now have a large capital gain that you do not want to realize yet, or your trading platform charges higher fees to trade ETFs, or you want to set up automatic periodic purchases and a mutual fund is the only way to do that.

Ultimately, your investment portfolio can only be perfect for YOU. We would love the opportunity to help you build a portfolio that will help you reach your financial goals. Shoot us an email to get started!

• Liquidity: ETFs trade intra-day, similar to stocks, so you can get a different price when you buy/sell at 10 a.m. compared to 2 p.m., for example. When you buy or sell a mutual fund, the price is determined at the end of the day.

• Tax Efficiency: Mutual funds and ETFs rebalance and trade their individual holdings throughout the year, and those trades may generate capital gains. Mutual funds and ETFs must pass those capital gains onto you, the end investor. The difference is that the structure of an ETF gives it the option to create or redeem shares or "creation units" that allows them to minimize capital gains for the end investor throughout the year. From your perspective, the capital gains don't just disappear when you hold an ETF. You'll still realize those capital gains once YOU sell the ETF in your portfolio, but it gives you more control over WHEN you will realize them, which can be important for your financial plan.

• Costs: ETFs are generally cheaper than mutual funds. There are a whole host of reasons for this, from operational efficiencies to commission/load differences. However, the average ETF is about half the cost of the average mutual fund when comparing expense ratios. There are exceptions to every rule, though, and trading fees/commissions also have to be taken into consideration when building your portfolio.

• Transparency: Mutual funds generally only report their holdings to the SEC, whereas ETFs report daily. This gives end investors more transparency into what the fund is actually holding and can help inform our investment decisions.

• Minimums and periodic purchases: Mutual funds often have higher minimums than ETFs, but you cannot buy fractional shares of ETFs, which may cause some operational issues in smaller portfolios. You are also not able to set up automatic purchases or sales into or out of ETFs like you can with mutual funds.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of the author and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation does not ensure a profit or guarantee against a loss.

Q2 2024 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Contributed by: Nicholas Boguth, CFA®, CFP®

When the circumstances change, our perspective evolves. This anthem of the past year highlights the importance of adaptability and openness to new information. But as much as things have changed this year, much has stayed the same. Megacap tech stocks are still driving the S&P 500 gradually upward for the year. The S&P 500 has had the best start to a presidential reelection year by logging 31 record highs this year and low volatility. Interest rates are still high. Stocks are performing better than bonds, while the U.S. continues to trounce international and large company stocks, which continue to beat small company stocks. 

Elections

The remainder of the summer and fall will surely be dominated by election headlines. Because elections can be divisive and unnerving, it's important to remember that markets are often resilient even in the face of the most unsettling election scenarios. Watch for an invitation to our upcoming election event to hear more details on this topic, but here are some quick observations:

• U.S. stocks trend upward on average in election years regardless of which candidate wins the White House

• Balanced portfolios historically help investors meet their financial planning objectives while managing risk over presidential terms

• It's time in the market and not timing that matters the most for an investor; sitting on the sidelines with long-term assets sitting in cash can be costly to a long-term investment strategy

If you look at average and median returns through a presidential cycle, you can see that election years tend to be strongly positive. Historically, median returns are over 10% in an election year, with average returns over 7% in an election year. 

Returns also tend to come more strongly in the second half of the election year, as shown in the chart below. This year has broken the mold with strong returns through the first half of the year. Usually, when this happens, there tends to continue to be strong returns also through the second half of the year.

What Has Led to These Strongly Positive Returns?

While higher interest rates and high inflation seem like a staple part of the economy now, it is easy to forget that we enjoyed decades of low interest rates, low inflation and globalization that drove those trends.

Inflation has resumed its slow march downward despite a small pause this year and some numbers that had looked like they might be turning back upward. It seems unlikely that inflation will accelerate and should continue to resume the disinflation trend. Now, most of the inflation comes from shelter costs, and we have seen rent prices level off and slow slightly. Rent prices starting to come down should help this source of inflation. You also may have noticed your insurance rates increasing. Car insurance has contributed notably to recent inflation numbers. 

Many consumers still feel the sting of higher prices because slowing inflation only means prices aren't going up at the pace they were. The price increases we experienced over the past several years are here to stay and will need to be permanently factored into budgets going forward. Many households have found substitutes by shopping around at bargain retailers, and some have been lucky enough to experience wage inflation (although not enough to offset economic inflation.

Interest Rates and The Fed

It is hard to talk about inflation without discussing The Federal Reserve and the current interest rate environment. As of the end of the quarter, the 1-year treasury rate was ~5.1%, and the 10-year treasury rate was ~4.4%. You are still getting paid MORE in short-term bonds than you are in longer-term bonds – that is strange! In a normal interest rate environment, you would get a higher coupon from longer bonds because, in return, you are taking on more risk and uncertainty from the longer time until maturity.

This environment has made it much more attractive to hold money market funds, CDs, and other short-term instruments, BUT those are not without risks of their own. If the 10-year rate falls, for example, then the risk of being in the short-term bond is that you will miss out on the price gains of the 10-year bond, and if short-term rates fall as well, then you will have to reinvest your money at a lower interest rate once your bond matures. Without knowing the path of interest rates going forward, there is no way to know with certainty which type of bond will outperform. However, we are here to help make sure your portfolio is positioned well for YOUR financial plan.

Speaking of the path of interest rates, despite inflation heading in the direction that the Fed wants, they kept the Fed Funds rate steady at the same rate as it has been for almost the past year: 5.25-5.5%. There are advocates on each side of the argument saying that they should have cut rates already OR that they should even keep further hikes on the table. Jerome Powell continues to stress data dependence and their commitment to the 2% inflation target, and this sentiment is shown in bond rates as rate cut expectations have continually been priced out of the market year-to-date. No one has control over inflation numbers, the Fed, interest rates, or the stock market – you have to  invest given the hand you are dealt.

AI and Meme Stocks

Several investment crazes have filtered into this stock market rally; some have long-term validity, and some don't. The evolving landscape surrounding artificial intelligence has strongly impacted any company investing heavily in it. Nvidia corporation has been the poster child of a rally surrounding artificial intelligence, which has been up very strongly this year, even though it has recently pulled back some. Nvidia is viewed as a pioneer in the space as its business shifted from gaming consoles to data centers where its chips now power large language models like ChatGPT.  Meanwhile, Gamestop found itself in the middle of the meme stock craze again. While returns attributed to meme stock hype are usually short-lived, the idea of social media heavily influencing trading performance is something the markets are still trying to make sense of. While investing in a long-term productivity enhancement like artificial intelligence can drive long-term fundamental returns, meme stocks are more about hype and short-term volatility.

Hopefully, you take a few moments to check out the Olympics this month. I am often in awe of the amazing talent seen from around the world. That kind of talent comes from a lifetime of diligence and hard work, much like successful investing. Natural ability or luck can only take you so far and can't be counted on. Athletes must train in various muscle groups and mental stamina to be successful. Much like athletes rely on diversified training in investing, we rely on asset diversification, good investor behavior, and consistent saving over time to reach our finish line. We are here to help ensure your investments are helping you reach the finish line no matter what the market environment looks like. Don't ever hesitate to reach out with any questions you may have.

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Any opinions are those of the Angela Palacios, CFP®, AIF® and Nick Boguth, CFA®, CFP® and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

"Lock in Yields"?

Contributed by: Nicholas Boguth, CFA®, CFP®

Some common verbiage was recently used in Bloomberg's newsletter: "Lock in yields!"

I never liked this phrase because it is a bit misleading for a few reasons: 

1. Nothing in investing is "locked in". Returns are never guaranteed. That bond issuer MIGHT default. You might not get all those coupons, or worse, you might not get all your principal back. Inflation might eat away at that real return, too, but that is a topic for another time. 
   

2. Many investors hear "locked in" and then forget about price movements. That coupon may be locked in, but if rates increase, then the price of your bond is going to decrease. This isn't necessarily a bad thing (you would be reinvesting at a higher rate, and alternatively, you can see your bond's price RISE if rates move down), but it is the nature of bonds and something investors need to be aware of. 
   

3. If you buy a 10-year bond yielding 5%, you "locked in" $50 per year. $500 over ten years is closer to a 4.1% return annualized. So, did you REALLY "lock in" 5%? Sort of, but maybe not in the way that you thought. Total return on bonds also includes the reinvestment of the bond's coupons, so the path of interest rates over the bond's life matters, too! 

You may think that a certain yield is attractive at a certain duration, but be sure to understand the risks that come along with all bond purchases, such as default risk (risk that you might not get your money back), interest rate risk (risk that your bond's price may move), reinvestment risk (risk that you might have to reinvest the coupons at a lower rate), inflation risk (risk that $50 now might buy you less than $50 in 10 years), and liquidity risk (risk that you may not be able to sell your bond easily when you want to). 

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.