The big question for investors now is where to be invested going forward. With the overall market trading at 20x earnings and first half gains concentrated into only a select few stocks, most of the market has been left behind. With the valuations of the high-fliers now in excessive territory, the rest of the market looks much more attractive. Value stocks and cyclicals such as financials, energy, materials and consumer staples are a relative bargain and beginning to see some traction. We have maintained value exposure in all of our strategies, seeing better risk/reward near-term than in large growth. Yet the best longer-term risk/reward is in areas not much investor attention has been paid to in several years.
We see potential in sectors and industries left behind in this tech-centric advance. The relative weaker performance of small cap companies to large caps appears to have begun unwinding. We have meaningfully added to small caps in recent months. Today, foreign markets are most attractive as they are generally at lower P/E ratios, and with virtually all regions (except Europe and Japan) growing faster, they offer better value. Plus, when the Fed stops hiking rates, the U.S. Dollar should weaken relative to foreign currencies, which enhances foreign markets’ performance in dollar terms.
We stay focused on what we can control and seek the best longer-term opportunities for growth. The impact and mistakes made during and after the pandemic continue working themselves out. This is a perfect example of the cyclical dangers we work to avoid with our time-appropriate strategies. For our clients with current income needs, we maintain a sufficient level of conservative assets to withstand periods of market weakness until the tide ultimately turns higher. With shorter-term needs funded, longer-term capital can remain invested for growth, and fund future goals. This is part of each client’s personalized investment structure. We like to tell our clients to go live and enjoy life, because we’ve got their backs!
The S&P 500® Index (S&P) is up 16% YTD after posting back-to-back 8% quarterly returns. In the face of a deteriorating economic backdrop and expectations for even higher interest rates, this exceeded even the most optimistic expectations.However, not all is rosy with this advance. 75% of the gain was due to only 7 mega-cap stocks, and 95% due to the largest 30 companies as the hype around Artificial Intelligence sparked near mania for anything related to the technology. The rest of the market advanced less than 1% – not the healthy advance of a broad rally. To signal a healthier investment environment, there must be broader participation across sectors and market caps. (For the record, as of this writing we are pleased to be beginning to see just that).
While surprising gains are welcome, they point to potential repercussions for the rest of the year. The S&P is now expensive, trading at a 20x price-to-earnings ratio (P/E). It seems rather optimistic that earnings can grow quickly enough to sustain these prices, in the context of a Fed predicting two more rate hikes this year, multiple signs of a weakening economy (outside of housing and employment), and the previous rate hikes having yet to fully impact the broader economy. Despite many signals to the contrary, markets appear to have ruled out not only recession, but slower earnings in a weakening economy.
Economic growth remains but is slowing. Spending in the travel, dining and other service sectors remains strong, but cash accumulations and consumer confidence are waning. The manufacturing economy is weakening as spending on goods is slowing. Credit card and auto loan delinquencies are rising while banks tighten lending to only the most credit worthy. As the summer travel season tapers off, we expect households to reassess spending and consumer demand to slow this Fall.
While much of the economy is contracting, some parts continue to grow (technology, travel-related industries, construction, etc.). The housing market remains strong due to a severe supply imbalance and continuing job growth. Assuming no widespread credit defaults, banking crises or liquidity issues, we may very well escape true recession and end up calling this period a rolling recession, where economic sectors phase through recessionary cycles at different times. This is what the market is currently signaling it believes is happening.
We are near the end of the Fed tightening cycle. Consensus views are for two more rate hikes of 0.25%. The drivers for these additional hikes are continued inflation in housing and services. Then, we will see how much demand destruction, credit constriction and confidence erosion has occurred and whether the economy can continue growth in the face of a 5.5% Fed funds rate. The narrative will be a slow moving and ever-changing picture.
Continue reading to hear how Integras Partners is navigating the current market.
There is a flawed assumption that 4% portfolio distributions are sustainable throughout retirement. Unfortunately, this has proven to be unreliable for too many retirees. The problem doesn’t lie in the math of a withdrawal rate but with the structure of the portfolio.
Retirement portfolios are often assigned a 60/40 allocation (60% stocks with 40% bonds and cash) with monthly distributions drawn proportionately across all assets, regardless of market direction.
In down markets, this strategy forces the sale of more shares to generate cash. The worrisome decision now facing the retiree is whether to increase the pressure on the portfolio by taking the same distributions or to decrease income. Neither is desirable.
Integras Partners takes a healthier approach to retirement income planning.
We layer our clients’ portfolios with designed strategies matching the timeframes of withdrawals.
By isolating more stable assets for short-term spending, we insulate early distributions from random market performance. Assets we don’t need until later have appropriate time to capture growth.
Our clients comfortably spend during market declines without being forced to choose between taking less income or the fear of possibly running out of money.
Several years ago, a client couple referred their neighbors. Let’s call them Jim and Kate. They had been married almost 20 years and had established careers and two younger children. After recently purchasing their dream home, they came to us to help consolidate multiple investments and build a financial plan for their retirement. We started by solidifying their college savings, reviewed existing life policies, and started managing their accumulated retirement accounts.
Jim was an early employee of his firm and was working with leadership to design his exit strategy. He wanted to spend more time with family, and was starting his own business. A few years later Jim got sick, and we sat with them at the attorney’s office to draft wills and healthcare directives. Fortunately, his life insurance was already in place, as insurance companies won’t issue a policy once a serious healthcare issue arises.
Jim recently lost his battle with a debilitating illness. Through the waves of emotions that followed, we were able to provide Kate with peace of mind around her financial future, so that she could focus on her family and their grieving. When she was ready, we helped her reregister accounts, file insurance claims, update her will, and refine college planning. Thankfully, the life insurance benefits more than covered expenses while she took a leave of absence from work and prepared their oldest child for college.
Kate has told us many times how grateful she is to be able to lean on us. A year after losing her husband, we helped her dismantle her inherited business and work through the pros and cons of strategies to help restart her life, including selling their family home and securing financial freedom.
Partnering with a trusted Financial Advisor now could be one of the most important moves you make. Life is unpredictable. When you find yourself faced with stressful life changes, having built strong advisor relationship will prove to be invaluable.
Article 5 of 5: Real Estate As An Investment Option
This is the final installment in a series of five blogs on how Owning Real Estate Complements Stock Risks. The series addresses the attributes and differentiating factors of real estate that pair nicely with traded stocks. The third & fourth segments review public real estate securities and the advantages of private real estate offerings.
Our previous blog in this series outlined the Advantages of Owning Private Real Estate. In summary, investors in private offerings will likely capture higher yields, realize less volatility, and have greater diversification benefits than public securities.
Private real estate can be accessed through a variety of investment vehicles. Below we discuss four categories.
Interval Funds are structured to trade like mutual funds but with limited liquidity. They are typically a “fund-of-funds”, meaning they invest in other real estate funds – large institutional funds that an individual investor would otherwise be unable to access. Interval funds keep some public stock and debt in their portfolio for liquidity. Since the underlying institutional funds have limited liquidity, interval funds also impose redemption limits. Typically, investors can only redeem 5% of the fund’s value per quarter. The interval fund may also have a one-year hold required to avoid a short-term redemption fee.
NAV REITS are perpetual-life REITs that directly own properties. NAV stands for net asset value, which is the value of the REIT’s assets minus its liabilities. These REITs are named for the way that their shares are priced, at their NAV per share rather than a price determined by trading forces. They are generally diversified portfolios focused on core property sectors. Liquidity limitations are similar to interval funds, but NAV REITs have more discretion than interval funds and can shut down redemptions during periods of portfolio stress. Federally, investors are required to meet moderate income and/or asset thresholds to invest in NAV REITs. Many states have additional requirements or limitations.
Private Placements are relatively small, narrowly focused, and riskier investments. They may be for new development, renovation projects or even rehabilitating distressed properties. Utmost care must be taken to evaluate the managers, strategy and track records. There are no liquidity windows and in some cases no income distributions. They bring the higher Accredited Investor standard, which is for millionaires or exceptionally high earners.
Delaware Statutory Trusts (or DSTs) are designed to accept 1031 Tax-free Property Exchange proceeds. Current tax law allows real estate sellers to defer capital gains by reinvesting all proceeds into a replacement property, or DST that owns replacement properties. DSTs may be illiquid for 10 years or more. They are also only available to Accredited Investors.
1 Registered Representatives that work through Broker/Dealers are entitled to charge these commissions, which are usually in the 6% – 7% range. Investment Advisors, who are held to a Fiduciary Standard, do not charge commissions for investments.
Article 4 of 5: Real Estate As An Investment Option
This is the fourth in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Our first blog in this series explains how commercial real estate investments enhance traditional stock and bond portfolios.
Briefly, real estate generates most of its returns from rental income, can diversify a traditional stock and bond portfolio, and typically holds value during inflationary periods.
Indirectly holding real estate through stocks and mutual funds often dilutes these benefits, as they are subject to market volatility. Real estate stocks offer attractive dividends, but as demand raises the stock price, their yield goes down. Real estate funds can reflect a broad (indexed) composite of the market, but this washes out the opportunities of manager selection.
Owning private commercial real estate means investing through a pooled investment vehicle that is not listed on a stock exchange. Non-traded real estate portfolios often pay higher yields and better retain value.
Since private real estate is not publicly traded, it is not subject to the market volatility responsible for much of the fluctuations of traded REIT or mutual fund prices. Non-traded funds typically are priced at their Net Asset Value (the value of their assets minus liabilities).
Mutual fund managers must sell their holdings at lower prices during periods of high redemptions. Non-traded funds avoid these pitfalls by limiting redemptions, so they are not appropriate for short-term investors.
Private real estate investment managers look to increase profits by focusing on opportunities.
When you buy stock in a traded REIT, you’re buying it from someone who wants to sell their shares, but the real estate portfolio itself isn’t changing. Investors in private offerings are adding new money to a portfolio, allowing managers to be strategic in putting that money to work, looking at real estate dynamics for today’s opportunities. To see how Integras Partners incorporates real estate and other “Real Assets” click below.
