NEWSLETTER

After much deliberation, I am beginning our year-end newsletter, with this quote attributed to Mark Twain. “If you don’t read the newspaper, you’re uninformed; if you read the newspaper you’re misinformed” His words resonate strongly in the context of stock market investing.

One of our longstanding clients, who follows a financial newsletter, recently shared some insights with me.  The Letter he read titled “Black Swan Event” was issued on October 28, 2023, and expressed concern about the DJIA’s proximity to a potential death cross and observed downward movements in various asset classes.

Interestingly, a week later, the same author shifted focus to “Interest Rates Plunge. The bottom was reach on October 27 and the next five days the S&P 500 had risen by  5.85%. Acting on the initial Black Swan warning would have resulted in being out of the market and missing the breathtaking subsequent gain. Most investors who have sold out of the market certainly don’t decide to get back in the next week.

To clarify , a “Black Swan Event” is a highly improbable, unpredictable occurrence with unseen consequences. Unfortunately for the author mentioned above, his fear proved unfounded, aligning with Mark Twain’s quote.

Around the same time, we strategically invested in a structured product through our competitive bid process, with Citibank as the winning bidder. This S&P 500 investment provides a full 10% downside protection with a total upside return of 14.85%, even if the index remains unchanged from the investment date. This decision wasn’t driven by market timing or undue optimism but by our structured product ladder’s maturity. Our ladder helps remove some emotions when investing, and encourages individuals to stay disciplined, crucial in avoiding losses due to emotional decision-making.

Reflecting on a client’s reaction during the onset of the COVID pandemic, we recall a challenging moment. Our client’s initial statement was, “Let’s sell everything and go into cash and we can buy back when Covid ends.” Money market rates at that point were only about .5 %. This was a taxable account that had been using our 3-part investment strategy for at least 20 years. Approximately 35% of holdings in their portfolio contained structured products with 10% downside protection. Another portion of the portfolio contained about 25% closed end funds (CEF’s).

As you are aware our goal is to purchase closed end funds when they’re trading at a high relative discount to their Net Asset Value. The remainder was invested in exchange traded funds (ETF’s), with a portion having covered calls written against them. Option writing provides favorable returns in an unchanged environment, as well as downside protection. As we continued our conversation, and emotions calmed a bit, we agreed it was a very dangerous period of time. We counseled our client that we felt we had a better way to help protect his assets in the event COVID was not dealt with correctly. We recommended the following four considerations:

1- After doing a complete analysis of his holdings, we reminded him of the downside protection he had on the structured product portion of his portfolio.

2- We suggested how we could vastly improve the portfolio’s downside protection immediately by selling (writing) covered call options with a long duration and deep in the money. This would reduce the risk on his ETF holdings, but this recommendation also reduces potential gains. There would still be profitable results if the market stayed unchanged.

3- I reminded our client that our structured investment ladder has maturities almost every two weeks and I suggested we could let those holdings mature and not reinvest until we felt comfortable.

4- Possibly what was the most convincing suggestion was the fact that if the portfolio were liquidated, the tax liability would be $600,000. This was in addition to any taxes due to the state of Pennsylvania. In effect it guaranteed he would have $600,000 less to reinvest. Fortunately, the result is that the client did exactly as we advised, and continues to be very grateful as well as very pleased with the outcome.

Despite prevailing pessimism among certain newsletter prognosticators, it is important to remember classic investment lessons. Naturally, no one likes to see their monthly statements decline during a bear market. However, market downturns are a reality. An adherence to our margin of safety investing strategy remains a cornerstone of Blue Bell Private Wealth Management.

In investing there are timeless lessons that we learn through repeated experience:

1- Trying to time the market– Is the act of moving invested money in and out of their stock market based on some type of prediction. Humans tend to act on emotions during market fluctuations, which underscores the importance of emotional control. In our opinion, it is impossible to time the market successfully in the long run.

2- Individual and hot stock tips-Understand your risk tolerance and don’t let market volatility frighten you.

3- Leverage and margin trading– A rule of thumb for me is never buy on margin. Like credit card debt, but not nearly as significant, are margin interest rates. When things go wrong margin increases one’s losses in addition to the interest paid on these borrowings.

4- Speculation: Relying solely on future valuations or paid newsletter recommendations can pose significant risks.

5- Impatience: Prioritizing short-term gains over a long-term balanced investment strategy can be perilous.

We love hearing from our clients and are here to help. As always please reach out with any questions you may have.

It is my sincere pleasure sharing my 50 years of experience with you. I would like to wish each and every one of you a joyful season filled with health, prosperity and happiness throughout the year.

Sincerely,

Scott Miller

2024 “Wall Street Expert” Stock market predictions

Every year, the top strategists from Wall Street’s biggest banks make their predictions for the S&P 500. We like to compile these predictions along with some commentary and share them with you. Please take these with a grain of salt as many of them are wrong as often as they are right. This is purely educational and not meant to me portrayed as a “market call”.

David Kostin, Goldman Sachs – 4700

Goldman leads a growing consensus on Wall Street that stocks will build on their 2023 rally but fail to crack the elusive highs reached just before interest rates skyrocketed.

Michael Wilson, Morgan Stanley-4,500

“The question for investors at this stage is whether the leaders can drag the laggards up to their level of performance or if the laggards will eventually overwhelm the leaders’ ability to keep delivering in this challenging macro environment,” Morgan Stanley said.

Binky Chadha, Deutsche Bank-5100

“Despite above-trend growth, core inflation has fallen,” the strategists wrote in a note. “Continued declines would return inflation to its pre-pandemic range without requiring slower growth.” Moreover, given that any recession “is widely anticipated and expected to be mild and short, we see only a modest short-lived selloff.”

Brian Belski, BMO-5100

“We believe 2024 will be Year 2 of at least a 3-5 year process that will see US stocks exhibit more normal and typical performance, paced by a backdrop of normal and typical GDP and earnings growth, valuation, and bond yield ranges,” BMO chief investment strategist Brian Belski wrote.

Savita Subramanian, Bank of America-5000

The strategists reportedly explained that U.S. companies have adapted to the higher interest rates imposed by the Federal Reserve and applauded the work of the central bank, which started embarking on an aggressive rate-hiking campaign last year to tame inflation.

Dubravko Lakos-Bujas, JP Morgan-4200

“We expect a more challenging macro backdrop for stocks next year with softening consumer trends at a time when investor positioning and sentiment have mostly reversed,”

RBC-5000

“Implicit in [our valuation] model is the idea that continued moderation in inflation can do most of the heavy lifting to prop up the P/E multiple, something our analysis suggests happened back in the 1970’s,” they wrote. ”

Here is a look at last year’s predictions from the same firms: