PFA Updates

May 21, 2024

Over the last two years, we have made decisions to reduce risk in client accounts given the uncertainty of rising inflation, interest rates and geopolitical events. We made these changes by reducing the amount of stock held in the US Small Cap, US Mid Cap and Emerging Markets sectors. We also reduced the number of bonds we held in accounts because we know that when interest rates go up, bond values go down. As we made these sells, we moved the proceeds into a Schwab money market fund that earned 5.29% over the last year.[1] When we evaluated this decision, we felt like an interest rate of over 5% with extremely low risk made a lot of sense as we went through a volatile couple of years.

We made our first buy back into the market last October and said at the time we were “dipping our toe back into the stock market with some of the cash”. That move has proved to be successful thus far, and in the next few days, we’re going to be making trades to eliminate our money market position and go back to our normal risk allocation.

We feel it is the right time to get fully invested into the stock and bond markets for the following reasons:

• “Stocks have rallied from June through December during 16 of the past 18 presidential-election years, and they’ve produced an average gain of 10% in those years” [2]
• “Stocks typically shine from June to August in a presidential-election year [3]
• “We project the federal-funds rate target range to fall from 5.25%-5.50% as of April 2024 to 2.75%-3.00% at the end of 2025”. [4] As mentioned earlier, when interest rates go down, bond values go up, so we want to be fully reinvested in our bond funds before interest rates start going down.
• “The hope for rate cuts within the next three to six months should prevent S&P 500 EPS expectations from falling sharply and push stock prices higher.” [5]
• Corporate America continues to be extremely profitable. “In total, 461 S&P 500 companies have now reported 1Q 2024 results. 78% have topped EPS expectations by an average margin of +7.30%.” [6]

While we are hopeful that the balance of 2024 can bring us continued market growth, know that we are regularly evaluating information from multiple economists and market technicians. If the data changes, we will be ready to respond, and if you have any questions about your accounts specifically, never hesitate to reach out to us.

Sincerely,

The PFA Investment Committee

Sources:

[1] schwabassetmanagement.com

[2] chaikin.com

[3] chaikin.com

[4] morningstar.com

[5] earningsscout.com

[6] earningsscout.com