NEWSLETTER

The Federal Reserve Board, made up of seven members from various professional backgrounds, appointed by the president may have been the subject of the most economic scrutiny of any group during the first half of this year. Only time will tell if their analysis is accurate. Don’t forget, it was not long ago that this group declared inflation to just be transitory. 

           The Federal Reserve’s goal was to tame inflation while at the same time avoiding a recession. A fine line that they have walked very well. As of this writing, we are still expecting a soft economic landing. The Consumer Price Index has fallen slightly over recent months and employment continues rather strong, both encouraging signs. What is ironic about the fine line, is that the Federal Reserve wants a strong jobs market and a strong economy, but not too strong because of the inflationary pressures that a strong economy causes.  

Artificial Intelligence (AI) is undoubtedly this year’s most discussed topic, as pundits predict its impact on companies, the economy, and the stock market. I enthusiastically wrote about the outlook for AI in our last quarter newsletter. Having guided clients through the similar internet boom of the late 90s, I believe that AI will usher in a significant period of corporate profitability. 

           The stock market when measured by the S&P 500, has risen significantly over the last 12 months. While the overall index has performed nicely, it was driven by just a few companies. Many individual stocks declined last quarter. Of the 11 sectors the S&P 500 is comprised of, 6 sectors were positive while 5 were lower. More dramatic is the fact that Utilities, always considered the most conservative sector of the market, was in the top three performers.  The AI/Technology sector was first, in addition to small but positive changes in the other four. What is amazing is that one company NVIDIA accounted for over one-third of the entire growth of the S&P 500. 

One company alone, Tesla, has indicated that they will spend between $3 and $4 billion with NVIDIA this year alone. The investment is expected to expand the use of AI within Tesla with everything from self-driving cars to factory robots. The growth is fantastic. What may be more surprising is the top 10 stocks in the S&P 500 made up more than 80% of the growth thus far this year.  

The good news is that every one of us has at least one position in these companies through investments in the S&P 500 Exchange Traded Fund as well as most of our Structured Investments.  Many more of our larger accounts own Closed-End Funds, which are purchased at a discount from Net Asset Value and are holding many of these positions in their top 10 holdings. This has improved their overall investment performance, as they are heavily weighted in Large Cap companies. One of our largest holdings, a Closed-End Fund, for example has had fantastic growth in NAV but also narrowed their discount this year. This CEF, founded in 1927, had a total 1-year total return of 39.9%, again, due to a combination of excellent investment management and having narrowed its discount from a historical average rate of 14.3% to a current discount of 9.2%. 

Closed-End Funds are currently my single favorite investment category and have been for the past year.  CEFs have benefited in general as discounts have narrowed. This comes after discounts had widened substantially in 2022 and 2023. 

 As a short review, CEFs offer numerous ways to generate capital growth as well as income. A few of the ways of generating profitable returns are from portfolio performance, managed distributions* and the advantages of being able to purchase a portfolio of securities at a discount from their actual Net Asset Value (NAV). When CEFs trade at a discount below their underlying Net Asset Value, opportunities to enhance investment returns rise. The amount of the discount, or premium, is measured as percentage of Net Asset Value, for example a 10% discount means that investors will be able to purchase shares at 10% less than their actual Net Asset Value. Additionally Closed-End Funds enjoy highly efficient portfolio management as shares may only be purchased or sold on an exchange and not by redeeming their holdings. These investment companies offer us the opportunity to invest in premier money managers while also receiving a discount. CEFs are purchased throughout the trading day, and we use limit prices to provide our clients with the best value as these markets can be inefficient. That is what gives us an opportunity especially compared to mutual funds. Another opportunity can arise through activist investors, which currently we are seeing at the greatest levels in my 50 years of recommending them for our clients’ portfolios. Hopefully this short review (helps makes clear) why these are my favorite investment vehicles in today’s market environment. One of the advantages to lowered discounts, CEFs are permitted to use that may help avoid activism takeovers are called managed distributions. For example, one of the investment companies we have large positions in, warded off an activist investor trying to gain control of their company, by offering 20% annual distributions. This helped cause the discount to narrow from over 16% to the current discount of 8%.  

            As all are aware, we attempt to add more certainty with less anxiety in our unique investment approach. Our 3-point investment process allows us the conviction that we will make it through the bear markets and put ourselves in a favorable position for market upturns. I believe this was well demonstrated in the horrible Covid environment where the S&P 500 dropped 34% from its peak on February 19th through March of that same year. We also suffered a rather significant correction from the highs of 2022, through October 2022 when the S&P 500 fell by 27.55% in a 10-month period. Thankfully we didn’t have a single household “give up” on investing and sell everything during these two market declines. It is important to remember during these painful corrections that the stock market in the US has NEVER failed to recover and reach new highs, just as we have in 2024. As of this writing, we are seeing most investors assume inflation has stabilized and is falling, although at a lesser pace as has been predicted. With falling inflation, the consensus is that the Federal Reserve will cut interest rates to prevent our economy from falling into an economic recession. Simply put the future of the economy, due to AI enthusiasm is all about growth, which will be a most important influence going forward. As mentioned, the consensus remains as strong as ever, for a rising business environment and stock market due to technology. Unfortunately, geo-political risks remain extremely elevated.  

We are long-term investors yet, are keenly aware of the stress short-term moves can cause. We do our best to not let this affect our investment decision making.  In my opinion the Federal Reserve will cut rates in 2024, the only question remains, will they wait too long? That is another source of anxiety over these next few months. Let’s hope by the end of the year the Federal Reserve did a fantastic job and didn’t act in a foolish manner.  

As always, we appreciate the confidence you place in us and enjoy sharing our opinions and how we plan, on how to profitably invest in the future.   

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Exciting News, Jon Honored As Man of the year…

On June 15th, Jon Sobotkin was selected as the Glanzmann Subaru Love Promise Playmaker at the Philadelphia Union game.

Jon was nominated for his contributions and volunteer work spanning over 18 years with the For Pete’s Sake Cancer Respite Foundation. He initiated Sharon’s Golden Buddies team for the For Pete’s Sake Walk event at Citizens Bank Park in memory of his sister Sharon, a beloved fifth-grade teacher who passed away from cancer in 2023. Over the past two years, through collaborative efforts with Blue Bell Private Wealth Management, Sharon’s Golden Buddies has raised over $50,000 to provide families facing cancer with respite.

Watch the video of Jon, surrounded by family, coworkers, and friends, as he is honored at the Union game using the link below.

Philadelphia Union Honor Blue Bell PWM Partner, Jon Sobotkin