Quarterly Insights - April 2024

Reflecting on my journey of over 50 years in the investment business, I am as passionate today about guiding others through the complexities of the financial world as I was when I began.

Reflecting on my journey of over 50 years in the investment business, I am as passionate today about guiding others through the complexities of the financial world as I was when I began. Unfortunately, during those early years, corporate culture often prioritized sales over client service. I was, however, fortunate to be part of a company that valued both its clients and representatives, leading me to become a partner at the NY Stock Exchange Company before the age of 30.

When I entered the investment business, all brokerage firms charged fixed-rate commissions. However, on May 1, 1975, the SEC mandated that brokerages negotiate their commissions instead of adhering to fixed rates. While many other brokerage companies raised their commissions, Charles Schwab, our custodian, created the first ‘discount brokerage’ firm. Later in 1986 Schwab became the first firm to allow clients to place mutual fund buy/sell orders 24/7. Schwab became a public company in 1987, and in 1992, they introduced no annual-fee IRA accounts. Schwab eliminated account service and order-handling fees for retail accounts and small business retirement plans in 2005, becoming the top innovator of our industry. In 2010 they announced reductions in online equity trade commissions, reduced fees on six proprietary ETFs, and introduced three low-cost bond ETFs. But the most significant change in my lifetime occurred when Schwab eliminated commissions on stock trades in 2022, which is a major benefit for our clients. Today this innovative company is the third largest investment firm in the US, and I am proud to use them as our custodian.

Fast forward to nearly 20 years ago, when Scott Jr., Justin, and I founded BBPWM. We wanted to flip the script, putting our clients and their families first. Choosing to become a Registered Investment Advisor (RIA), we now operate in one of the largest and fastest-growing areas of the business. Becoming fiduciaries is a cornerstone of our practice, distinguishing us from the larger Wall Street firms.

Shifting gears to current market trends, one of the most exciting developments affecting the equity markets is the growth of financial intelligence. Just as the enthusiasm for Artificial Intelligence drove the stock market rally since October 2022, we witnessed a tech-linked rally sparked by what has become known as the “Magnificent 7.” In 2023 these seven companies, all part of the S&P 500, make up a startling 30% of that Index and have outperformed the broader market significantly. Think of it, just 7 out of the total 500 companies make up 30% of the total market capitalization. Thus, the first quarter rally may be slightly exaggerated. With our investment model building in some downside protection, we are optimistic for portfolio stability for the remainder of the year. We believe with continued A.I. enthusiasm, potential rate cuts, and robust earnings growth, the stock market is poised for further upward growth for the remainder of the year.

While I wish I had a crystal ball to predict the future, it’s clear that the continued rise in prices across nearly every sector of the economy is a pressing concern. I certainly understand the detrimental effects of inflation, having started a family in the seventies and experiencing the rising costs of everything, which was horrifying. With inflation not being addressed until the 1980’s we experienced a “lost investment decade.” Inflation hit a high of 14.6% in March of 1980 – we can never let that happen again. As in the past, the current surge can largely be attributed to excessive government spending, resulting in significant budget deficits and higher prices. Despite media reports suggesting a decline, inflation remains elevated. While the growth rate of inflation has decreased from 9% in June 2022 to approximately 4% currently, achieving the Fed’s target of 2% will not be easy. What we must be mindful of is not causing deflation, which could result in massive unemployment and a significant contraction of the economy.

The Federal Reserve’s recent strategy to combat inflation primarily involves increasing borrowing costs, namely interest rates. Many Americans are reevaluating major financial decisions, such as home purchases. This example underscores the significance of interest rates on mortgage payments. The jump from a 3.5% mortgage rate, only a few years back to 7.75% for a 30-year term on a $500k home results in an increase of $1,337 a month or nearly $16,044 a year in interest payments alone. Nonetheless, as I stated earlier, the stock market experienced continued growth in the first quarter, fueled by optimism surrounding potential interest rate reductions and the significant efficiencies that A.I. has created. This will positively affect other areas of our economy.

Amidst the economic fluctuations, corporate earnings remain resilient, serving as a crucial determinant when investing in securities. It’s imperative to understand the impact of these economic fluctuations on our overall economy. Inflation has slowed, but not enough, new investments in real estate have been affected the greatest. We are seeing continued rising prices across almost all sectors of the economy. Again, the good news is that advancements in technology are expected to enhance productivity and mitigate overall consumer product costs in the future.

Looking ahead, continued strong corporate earnings, closely monitored by the Federal Reserve, are expected to support the economy and stock market throughout 2024. What we don’t want to see is inflation with a receding economy and stock market. As mentioned earlier, the 1970’s are a good example of this, where the term “stagflation” was used to describe the economy. Stagflation is where persistent high inflation is combined with high unemployment and stagnant demand in a country’s economy. Presently, employment remains robust, unemployment rates are low at 3.5%, and investor sentiment continues to be positive.

While interest rates have yet to decline significantly, there is optimism surrounding potential rate cuts this year, when the Fed believes inflationary pressures have cooled enough. The upcoming election year will most likely introduce increased market volatility, however historical trends suggest that the stock market tends to navigate election concerns relatively well.

Reflecting on recent market dynamics, the stock market rallied in 2023, rebounding from the downturn experienced in 2022. Our disciplined investment approach, including structured products with partial downside protection and covered call writing, proved advantageous for our clients during that uncertain time. Looking ahead, we anticipate market expansion and diversification, transitioning from a highly concentrated environment to a more typical investment climate.

Tax season serves as a reminder of the importance of tax efficiency in our investment strategies, with long-term gains and qualified dividends taxed at lower rates than ordinary income. Currently, we have three certified financial planners dedicated to serving you and your family, and we hope you will take advantage of some of the services we provide. The feedback from those who have used some of these investment enhancements has been excellent. These include but are not limited to, a review of your tax documents, tax planning, reviewing, updating, and creating basic wills and trust documents, as well as financial, estate and investment planning. We encourage you to take advantage of our expertise in these areas.

Since our last newsletter, we are thrilled to inform you that we have added two professionals to our BBPWM team: Dan Levinson and Elliot Williams. Dan and his wife Hagar, have a 4 ½ month old daughter, Romi. Elliot and his wife Bridget are excited as they are expecting their first baby in just a few weeks. We hope that you will get to know them and welcome them both to our growing team.

We want to thank all our clients, including the many of you we serve that span multiple generations. Your continued trust and loyalty are crucial to us, and we remain committed to you and your families’ financial success. Feel free to reach out to us in whichever way works best for you. Whether by phone, email, or text, we’re here to assist you with any questions you may have.

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