Obermeyer Wood News - Spring 2024
Marketpoint: The Bumpy Descent to a Soft Landing
The U.S. economy kicked off 2024 by continuing its defiant march forward through the headwinds of the historic interest-rate-hiking campaign by the Federal Reserve. With conditions holding up sufficiently well under the weight of a 5.25%–5.5% benchmark rate since July 2023, the Fed appears content to take a patient approach to cutting rates as it waits until later this year for further evidence that inflation is firmly heading to its 2%. With a soft landing likely coming into focus and markets looking forward to rate cuts and further AI-fueled growth, it is important for investors to remember that nothing is guaranteed, and that keeping a level head is paramount to staying steady during both the good and the bad times.
The Economy and Markets
Inflation remains a sticky concern and progress in 2024 has been slightly underwhelming. On a year-over-year basis, inflation rose by 3.2% in February, a slight rise from the 3.1% report in January. The prices of shelter and gasoline saw upticks through the beginning of the year, and combined, these two items accounted for over 60% of the price increases measured in the February Consumer Price Index report.1
Meanwhile, the robust jobs environment continues to fuel the economy and give room for the Fed to continue its fight against inflation. The unemployment rate rose slightly to 3.9% in February, the highest rate since January 2022, up from 3.7% the prior month.2 The jobs report, while showing ever-so-slightly higher unemployment and high-yet-moderating wage growth, was welcome news for the Central Bank, which wants to lower inflation further while avoiding a recession and mass unemployment.
Sustained jobs mean a stronger consumer. Household spending is expected to increase 2% this year, and in an economy that is slowing yet still growing, a healthy consumer is the engine accounting for over two-thirds of gross domestic product. U.S. GDP projections for 2024 have improved significantly over the last six months, with an anticipated average of 2.2% among surveyed economists in late March, compared with the earlier estimate of 0.9% in September 2023.3
Globally, there is encouraging economic news. International trade has been resilient in the face of supply chain disruptions; shipping volumes in Los Angeles and Hong Kong increased in the first quarter, and U.S. export orders expanded for the first time in 19 months.4 The Eurozone narrowly avoided a recession in 2023 and economic sentiment is improving amid projections of modest growth for the rest of 2024.5 China’s industrial profits returned to growth at the start of the year, hinting that the world’s second-largest economy is on stronger footing after a dismal 2023.6
Moving on to the markets, investors cheered as equities continued to rally on expected gains in productivity driven by artificial intelligence (A.I.) and potentially higher economic growth if the Fed cuts rates later this year. Major indices reached new highs in the first quarter of 2024 due to investor optimism.
The market rally has expanded in recent months, with bullish sentiment fueling a transition from the 2023 narrative where only a handful of stocks propelled major averages upward to a scenario where investors increasingly favor nearly all sectors, although technology continues to underpin gains. Ten of the 11 sectors of the S&P 500 were positive to start the year—real estate was the exception—and the equal-weight S&P 500 tracker hit all-time highs in late March. And while stocks might seem expensive given the 20%–30% market increase since March 2023, a case can be made that strong earnings and economic growth prospects keep the door open for the rally to continue. There are still attractive valuations in many corners of the market, as eight of the 11 S&P 500 sectors trading at a discount compared with pre-pandemic levels—with technology, materials, and industrials trading at a premium.7 As seen in the chart below, the 490 stocks outside of the index’s top 10 performers have an attractive average price-to-earnings ratio of 16.5x.8
In the bond market, the yield curve inversion officially became the longest such event on record, as yields on the 2-year Treasury securities continued to exceed those of 10-year Treasuries for over 630 days as of March 31.9 As a result, investors saw little reason to increase duration, and bonds struggled as the year began. However, enticing yields in shorter-term securities continued to provide attractive income and downside protection. Crypto came roaring back from its 2021–2022 pullback, and gold hit an all-time high of over $2200 per ounce.10
Looking Ahead
The economy and markets have given us a lot to feel good about lately. The Fed has made considerable progress on inflation; the economy has held up well under high rates and allowed that fight to continue, and markets have benefitted from both of those factors. The A.I. tailwind, the anticipation that gentle rate cuts will start later this year, falling inflation, historic levels of cash sitting on the sidelines, and strong corporate earnings could allow the market to continue at its current level, if not rise.
However, we are acutely aware of the risks that remain. The Fed’s fight is not over, and the market could be surprised to the downside if rate cuts aren’t as soon or as sizable as expected. If the Fed keeps rates higher for longer, we expect to see more impacts on areas like commercial real estate and regional banks. Wars in the Middle East and Ukraine mean elevated geopolitical risk, as supply chains could be further affected if the conflicts escalate. A pullback in the stocks that have experienced enormous valuation runs over the last year is also possible.
Finally, many investors are looking ahead to the presidential election later this year. We understand that strong feelings about either political party can cause anxiety regarding the outcome and its impact on our lives. Putting aside political beliefs and focusing only on the numbers, presidential election years between 1923 and 2023 have averaged an 11.57% return in the S&P 500 compared with the 10.01% average of all years, and 83% of election years have coincided with positive returns in the stock market.11 This should serve as no guarantee for what will happen this year. We expect volatility as the election heats up and charged headlines consume the media landscape, but we take comfort in the precedent from market performance in a broad sample size from past election years.
Our Approach
As we have done during all phases of the business cycle over the last few decades, we remain optimistic. We continue to adhere to our disciplined, long-term approach to building and protecting our clients' wealth. With some valuations soaring and the rally broadening, we are maintaining diversification to keep exposure to some of the stocks that have been doing well yet also increase exposure to other sectors that are expected to rebound. More than 71% of stocks in the S&P 500 carry forward price-to-earnings multiples below the index’s level, and almost 49% are below their pre-pandemic average.12 On the fixed-income side, we continue to take advantage of high yields in short-term treasuries and money market funds.
Finally, we manage risk through thoughtful securities evaluation and client asset allocation. We work with our clients to assess their needs for invested funds over the coming years and adjust their holdings to try to avoid selling stocks at bad times. If you have experienced any changes in your life that might affect the way we manage and try to grow your wealth, please let us know. It is an honor to serve you and your loved ones; thank you for your continued trust and partnership.
[1] Bureau of Labor Statistics: Consumer Price Index – February 2024
[2] Bureau of Labor Statistics: The Employment Situation – February 2024
[3] https://www.bloomberg.com/news/articles/2024-03-25/us-2024-growth-outlook-goes-from-gloom-to-bloom-in-six-months
[4] Bloomberg Global Trade Indicators – March 2024
[5] European Union DG ECFIN – Business and Consumer Surveys March 2024
[6] National Bureau of Statistics Report – March 28 2024
[7] Bloomberg Data
[8] JP Morgan Guide to the Markets – March 31 2024
[9] https://www.reuters.com/markets/rates-bonds/us-treasury-key-yield-curve-inversion-becomes-longest-record-2024-03-21/
[10] https://www.cnbc.com/2024/04/01/gold-prices-hit-new-record-high-on-fed-cut-expectations.html
[11] https://www.hartfordfunds.com/practice-management/client-conversations/investing-for-growth/presidential-election-years-have-been-good-for-investors.html
[12] US Stock Discounts Are There, Just Harder to Find – Bloomberg March 27, 2023
RECOMMENDED READING
Same as Ever: A Guide to What Never Changes by Morgan Housel
“If you understand the math behind compounding, you realize the most important question is not 'How can I earn the highest returns?' It’s 'What are the best returns I can sustain for the longest period of time?' Little changes compounded for a long time create extraordinary changes. Same as ever.” – Morgan Housel
Following up on his best-selling first book, The Psychology of Money, Morgan Housel uses his trademark plain-English commentary, coupled with 24 short stories spanning ancient and recent history, to explain human behavior's predictability. By exploring the repetition of certain habits and practices, he provides life lessons, financial and otherwise, to encourage readers to lead better lives in the future.
The book doesn’t feel like a self-help book but rather an examination of psychology, human nature, behavioral economics, investing, and social studies, told through the lens of quick and captivating storytelling. In a world that feels like it might be changing faster than ever before, Housel says that predicting “what the world will look like fifty years from now is impossible. People will still respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations, and social persuasion in the same way is a bet I’d take.” With this idea in mind, he argues that understanding these enduring truths can provide a solid foundation for navigating the uncertainties of the future.
Given our firm's prior recommendation of The Psychology of Money, we decided Housel’s second act was worth the read and easy to digest. If you would like a copy of either of Housel’s books, please reach out to our team.
FIRM UPDATES
Ali Flynn Phillips Promoted to President
In early February, we were delighted to announce Ali Flynn Phillips’ promotion to President of Obermeyer Wood Investment Counsel. Ali joined Obermeyer Wood in 2005 after a decade in the institutional finance sector, where she worked in debt capital markets, corporate derivatives, and strategic planning for Goldman Sachs and Salomon Brothers. Over the past 19 years, she has been Wally’s partner in strengthening Obermeyer Wood as a financial firm. In her time on the executive committee, she has overseen firm operations and spearheaded strategic initiatives, contributing to the growth of the firm from $250 million in assets under management to $2.3 billion in 2023. Barron’s, Forbes, and CNBC have all recognized Ali, and our firm, as a top wealth advisor. Ali is now one of the few female leaders in the investment advisory world. Within an industry dominated by men, we are proud to have a leadership team that reflects the diversity of our clients.
Vail Acquisition and Expansion
In early January, we acquired Vail-based investment firm Booth Creek Capital and welcomed its founder, Adam Savin, as Partner and Vice President, Investments. Adam founded Booth Creek Capital in 2010, investing with a dividend-focused equity strategy, and grew it to over $100M of assets under management. Prior to Booth Creek, Adam served as the head of Merrill Lynch Global Strategic Investment Group in New York, where he oversaw a multibillion-dollar long-short equity fund. Earlier in his career, Adam held positions at Morgan Stanley, where he managed a billion-dollar long-short equity portfolio. Obermeyer Wood’s top priority is to provide investment and wealth management solutions for our clients. Adam’s investment knowledge and focus on dividend stocks broadens our investment team and provides a targeted approach for our clients who desire income. His proven track record in the investment industry aligns with our commitment to delivering the highest-quality financial solutions. We are excited to have Adam as a senior member of our Investment Committee. With the acquisition of Booth Creek Capital, we will be expanding into the Vail Valley. Stay tuned as we finalize plans for our new Avon location later this year.
Promotions
We are delighted to announce the well-deserved promotions of these outstanding individuals within our team:
- Sean McGechie, Associate, Corporate Concierge
- Tracy Mosher, Associate, Corporate Concierge
- Mikaela Durben, Manager, Strategy and Operations
- Charlton Rugg, Chief Compliance, Legal, and Technology Officer, is joining our Executive Committee.
Please join us in congratulating Sean, Tracy, Mikaela, and Charlton on their new roles. Their dedication, hard work, and embodiment of our core values are truly commendable and serve as an inspiration for our entire firm.
Obermeyer Wood Recognized by Forbes and Barron's
In March, Chairman and Chief Investment Officer Wally Obermeyer and President Ali Phillips represented our firm again this year in Barron’s list of the nation’s Top 1200 Financial Advisors. Our firm was grateful to be listed as the top independent advisor in the state, and one of only a handful.
Just a few weeks prior, Phillips and Senior Vice President Dana Nightingale were named among Forbes and SHOOK Research’s Top Women Wealth Advisors in the United States and Colorado.
Ali was ranked No. 42 and Dana No. 53 in the national list, which includes 100 advisors collectively managing almost $284 billion in assets. Both also made Colorado’s top 5 on the “Top Women Wealth Advisors Best-in-State” list, marking the eighth year in a row that our firm has received both national and state recognition for Top Women Advisors.
“These awards reflect our entire team’s commitment to our client-first approach to our work,” said Phillips. “We are grateful to the clients, many of whom we have worked with for decades, for trusting us to deliver sound investment management, strategic financial planning, and personalized wealth advisory services.”
Visit Forbes’ website to view the complete rankings and our website for important information on ranking methodology.
Best-in-State URL: https://www.forbes.com/lists/best-in-state-women-advisors/?sh=5f37aab91d11
Nation URL: https://www.forbes.com/lists/top-women-advisors/?sh=34ee69cf2a8f