October 3, 2023
Dear Valued Client:
Q3 2023 CLIENT LETTER
Market Recap and Outlook
The S&P500 and the other major indexes finished the third quarter down slightly by low single-digit percentages, but still maintained solid gains for the year-to-date period.
The reason for the volatility was based on some things we have previously mentioned. The stock market is simply worth less as interest rates go up. In the third quarter, interest rates went up slightly and there were some indicators that showed inflation was still a challenge. Additionally, the Federal Reserve reiterated a “Higher for Longer” outlook. The good news is that earnings are still solid, and the long-awaited recession is still not here.
Accordingly, markets begin the fourth quarter decidedly more anxious than they were at the “Halftime” part of the year. The first few days of October have already brought us a sell-off.
The performance for the rest of the year remains “data dependent” as it pertains to inflation, corporate earnings, Fed policy, and foreign affairs. The issue with the House speaker being removed also adds fears to a government shutdown in November. The good news going forward is that a lot of the economic data is very good. Employment, consumer spending, and business investment were all resilient in the third quarter.
Market Recap and Outlook continued
An economic slowdown is possible, but it has not happened yet. This is in the face of student loan repayments starting up again, declining US Savings, and a decline in housing prices from the recent peak.
Regarding inflation, oil prices rallied in the third quarter, but other metrics trended in the right direction. The temporary peak in real estate prices is also positive on the inflation numbers. Remember if inflation becomes less of a challenge, then interest rates will stop increasing. With interest rates peaking and then possibly declining, stocks and bonds become more valuable.
At the current time, we do see opportunity in the fixed-income markets as interest rates are starting to peak. Bond yields are not only attractive, but there is a chance for gains as rates eventually come down. We continue to like higher yielding municipal bond funds with tax-exempt yields now over 4% in many of those securities. Bonds are subject to both credit risk and interest rate risk, but we are comfortable with that. Should you sell stocks to buy these fixed income investments? NO is the answer in most cases. The stock components of the portfolios we manage are for the longer term. We are comfortable with mostly fixed income investments for new money until we see further opportunities in equities. Please contact us regarding your own situation.
Regarding stock market valuation, consensus estimates for the year 2024 are about $250 per share for the S&P500 and $270 per share for the year 2025 (*). We would like to see an earnings yield of 6%. Using simple math, this would put a valuation on the S&P500 at 4,167 for next year’s earnings and 4,500 based on earnings for 2025. As of this writing, the index was trading at 4,229. We think the market is fairly valued now after the sell-off.
Again, clients are advised to hold positions and contact our office in advance when adding large lump sums.
Wealth Management Issues
Clients are advised to check with us on your insurance issues. Younger clients need to pay attention to life insurance and disability insurance. Clients at or near retirement need to see if you have enough assets to self-insure long-term care needs. Clients with a high net worth may need insurance to deal with estate taxes. We offer these products to our clients and only use them when they are needed. It is important to have these discussions with us.
Estate planning documents need to be reviewed as well. You may need to update your will, durable power of attorney, and advance health care directive.
Our office is very diligent in making sure your portfolios match up to your cash flow needs. As we get closer to the end of the year, we will review all accounts to take advantage of any tax benefits.
Office Updates
Eileen and I will head to South Florida on October 16th. We will be in NJ during the Thanksgiving and Christmas holiday weeks.
Due to increased business, we are growing again. We have added a new employee to our team. His name is Mike Rytelewski and he graduated with an accounting degree from Widener where he was the starting short-stop on their baseball team. He has already passed the Series 7 exam and is studying to pass the Certified Financial Planner exam. Please welcome him.
Again, if you would like a financial check-up, please contact the office. Thank you so much for your business!!!!
Sincerely,
Jack D. Oujo, CPA/PFS, CFP, CSA, MS Taxation
Certified Senior Advisor
Disclosures
- Investment Recommendation Disclosure: The client acknowledges that the representative is relying upon the client information (e.g. risk tolerance, time horizon, and investment objective) for the purposes of providing recommendations to the client. The client agrees to give the representative notice of any significant changes in the client information and to provide the representative with any additional information that the advisor may reasonably request.
- Historical Performance Disclosure: Past performance is not indicative of future results. The investment return and principal value will fluctuate with the market. Investor’s shares when redeemed may be more or less than their original cost.
- General Market/Investment Risk Disclosure: Investments are subject to market risks including the potential loss of principal invested. Yields and prices will fluctuate along with the market and other economic conditions. Securities may be worth less than the original cost when redeemed.
- Information Disclosure: The information contained herein has been obtained from sources considered to be reliable, but Avantax does not guarantee the accuracy or completeness of any statement.
- A portion of municipal bond’s income may be subject to state or local taxes. A portion of a municipal bond’s income may be subject to the federal alternative minimum tax. Investing in municipal securities can be volatile and include such risks as: adverse tax or court rulings, legislative or political changes, market and economic conditions, issuer, industry-specific (including the credit quality of municipal insurers), and other conditions.
- The Avantax affiliated companies exclusively provide financial products and services, and do not provide or supervise tax or accounting services. Advisors may provide tax, accounting or other services through their independent outside businesses, but these services are separate and apart from Avantax.
- Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.
- Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
- Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of the fluctuation of price levels of such securities. An investor should consider his or her financial ability to continue his or her purchases through periods of low price levels.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
(*) Performance and Data numbers are per Morningstar. Client spreadsheets are normally sent four times per year to clients with over $750,000 of investment assets and twice per year for clients at the $500,000 to $749,999 level.
