Light at the End of the Tunnel

Light at the End of the Tunnel

Laser-focus on inflation was the key driver of both interest rates and market performance over the past two years.

Inflation continues retreating towards the targeted 2% range, which should largely be achieved around mid-year. We expect the Fed will begin lowering rates during the summer. While the bond market has priced-in 6 rate cuts for the year, beginning as early as March, we believe it will be a more modest and later cutting cycle. From there, the narrative should shift from inflation and interest rates back to the fundamentals of economic growth and earnings. There is still a risk that the economy could pick up steam and inflation return to haunt us once again, a la 1980. Nor are we out of the woods of potential economic weakness. But we see light at the end of the tunnel.

We remain optimistic about the long-awaited resurgence of small-cap, value, and international stocks closing the performance gap versus U.S. large-cap growth over the ensuing economic cycle.

The old maxim of ‘no tree grows to the sky’ will ultimately prevail. We find it unlikely that valuations of the “Magnificent 7” can continue to rise unabated. Valuation is a fundamental driver of long-term performance, and small caps and international markets remain undervalued relative to history.

As we expect a return to economic fundamentals over 2024, much depends on the economic growth and labor productivity needed for earnings to meet or exceed expectations. Should the economy slow, stock markets will have a hard time producing meaningful gains. While not our base case, we will remain mindful of the many economic indicators still flashing red.

We understand it is an election year. As November approaches, we typically see markets stagnate or slightly decline as the uncertainty and anticipation mounts. However, history tells us that regardless of who wins, there is negligible impact on financial markets in aggregate. In the end, regardless of whether your favored party wins or loses, there is no advantage in changing investment policy.

The normalization of interest rates is an uncertain path and forecasting economic growth is even more difficult. As investment themes change throughout the year, we will be looking for areas where valuation and earnings potential appear strongest – a disciplined approach that has served us well long-term.

What remains paramount is our desire to always take care of our clients’ current investment needs, while working towards achieving long-term investment goals.

With our time horizon investment process, we have successfully sheltered near-term spending needs from market disruptions, giving the longer-term assets the time needed to allow these disruptions to play out. Our long-held mantra of “go live life, we’ve got your back” has worked throughout this period of upheaval and we will be making sure that continues.

So, enjoy today and tomorrow, and let us do the worrying!
Contact us to discuss your situation if you’re interested in our time-horizon strategies.
Call us to review your investment approach at (404) 941-2800.

Reflecting on 2023

Reflecting on 2023

2023 was a year of haves and have-nots.

While the S&P 500 rose 26% at the headline level, it was almost entirely due to just seven “magnificent” tech stocks. The remaining 493 names contributed very little – on average up just 4%. This concentrated market condition continued through October when we finally enjoyed broadening market participation. Small cap stocks began a long-awaited turn-around with a two-month advance of 16%. The broad International Index rose 18%. Both are areas we overweighted in 2023 due to their relative valuations. While we think these sectors will continue to waffle back and forth for several months (as January has already shown), we expect a further broadening of market performance once we get some assurance on timing of Federal Reserve rate cuts.

Interest rates have been the story since early 2022 and October showed what happens when our uncontrolled fiscal deficit intersects with decreasing foreign demand for Treasuries. The 10-year Bond went from a yield of 3.3% in May to 5% in October as auctions witnessed a pullback in foreign investors. This will become a larger theme in the future should our deficit growth continue unabated. Nevertheless, as inflation readings continued to decrease during the Fall and the market began anticipating rate cuts, the yield on the 10-year treasury ended 2023 at 3.9%.

We wrote last quarter that we were cautiously optimistic.

But the year ended better than, even we, anticipated. Surprising employment strength and increasing home prices have remained dominant forces keeping the U.S. from entering recession. As consumers spend down COVID savings, they remain heartened by job stability, so overall spending has remained quite strong. Strong home values have also buoyed consumer confidence. This is very different from the historical pattern (although welcome and needed). In a normal economic contraction, people lose jobs and must sell homes, increasing housing inventories which bring prices down. In this rate cycle over 90% of existing homes carried mortgages under 4%. People were not forced to sell and have no desire to trade a 3% mortgage for a 7% mortgage. Inventory remains tight while demand stays solid, so prices have risen. The banking system remains resilient, financial conditions have eased, and financial market performance followed.

Heading into 2024, we see light at the end of the tunnel, while recognizing the risks that are still present.

So, enjoy today and tomorrow, and let us do the worrying!
Contact us to discuss your situation if you’re interested in our time-horizon strategies.
Call us to review your investment approach at (404) 941-2800.

Where are the Opportunities in Today’s Markets?

Where are the Opportunities in Today’s Markets?

Bullish sentiment ran out of steam during Q3 2023. In a previous blog we discussed the primary culprit for that. All that said, we are now in the final quarter of the year. Investors entered October in a pessimistic mood and with lots of cash riding out the storm in money market accounts (earning close to 5%). Historically, the last quarter usually sees the strongest market performance. On the back of some pessimism, we think the stage could be set for a significant catch-up.

We recently increased client stock exposure in anticipation of a rebound. We focused on small and mid-cap companies that have not followed the market-moving “Magnificent 7” (the new FAANG stocks). We are much more comfortable with the potential downside when buying at 14-15 times earnings vs. 35-40 times for the largest tech companies.

We have also recently increased safety within our shortest time horizon “Liquid Assets Strategy” by selling our high-yield bond fund position. We think a credit crunch has begun and choose to hold risk-free cash earning 5% rather than accept the risk of BBB-rated bonds earning 6%.

Economic growth is slowing. Businesses are faced with refinancing debt at much higher interest rates, and rates may remain high for many months. Corporate earnings should stay positive but are still vulnerable. The Consumer is still strong, as are home prices and employment. But leading economic indicators continue to weaken. Investors are having a difficult time forecasting the future. It’s a toss-up as to whether the Fed can engineer the magical “soft landing” markets were certain of just a few short months ago. Market sentiment is terrible, and we view this as an opportunity.

The war in the Middle East is heartbreaking, and we keep the civilians at the forefront of our prayers. The cold calculus of markets and economics is that unless the conflict broadens into a regional affair there should be little impact on financial markets. Should it widen to include Iran in particular, that calculus will change.

There have always been geopolitical events and market uncertainties. Our time horizon strategies coupled with detailed financial planning reduces the impact of market risks on our clients’ ability to live the lives they choose. When investment risk is pushed to long time horizons, growth strategies are allowed to perform their best. Over more than a decade, Integras Partners has successfully navigated tumultuous periods without having to give up exposure to the long-term growth needed in almost every portfolio.

Our structural portfolio design provides the comfort to enjoy life today, recognizing that while markets are inconsistent, freedom to live life isn’t.

Call us to review your investment approach (404) 941-2800.

Will Rising Interest Rates Cause a Recession?

Will Rising Interest Rates Cause a Recession?

August, September, and October are historically the worst three months for market performance and 2023 was no different. Everything but cash, oil and short-term treasuries had negative 3rd quarter returns. The S&P 500 lost 3.25%, small caps fell 5%, international markets dropped 3.5%, and long-term treasuries lost an astounding 8%.

The culprit was interest rates. Not just the shortest-term rate that the Federal Reserve controls but also long-term rates, which are determined by bond traders. There were two main reasons that long-term rates went up sharply. First, the Fed made it clear that it intends to hold interest rates high far longer than the bond market expected. Second, with the US fiscal deficit climbing, the Treasury must issue and sell more bonds. Simple supply/demand dynamics resulted in lower bond prices, which pushes interest rates higher. The 10-year US Treasury note began the quarter with a rate of 3.85%. At the end of September, it had risen to 4.8%. Rising rates are bad enough but when they rise at such a fast pace, long-term assets with a yield – dividend stocks, bonds, real estate, etc. – lose value quickly. For example, defensive stocks such as utilities lost almost 10% during the quarter. And since the beginning of 2021, the 20-year US Treasury bond has lost a staggering 50% of its value. All due to interest rates.

Today we are at an interesting crossroads. The Fed may be done (or close to being done) raising short-term rates as inflation is cooling off. But we are not out of the woods yet. We have outlined the signs of potential recession in several past commentaries, and they continue to become more apparent. What’s sustaining our economy is the robust consumer and very low unemployment. Consumers are showing some signs of slowing down, and employers are less eager to hire than just a few months ago. It’s natural that the economy will continue slowing as rate increases keep working through the economy. It will be a close call as to whether inflation can slow to the Fed’s stated goal of 2% before economic growth becomes economic slowdown. It may be several more months before the answers play out.

However, we see some opportunities today. Entering the 4th quarter we updated our positioning into areas where we see that opportunity. Read More . . .

Call us to review your investment approach (404) 941-2800.

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Finding Value in Overlooked Sectors

Finding Value in Overlooked Sectors

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!

If you’re interested in learning more, give us a call at (404) 941-2800, or reach out to us about your situation

Comparing Private Real Estate Offerings

Comparing Private Real Estate Offerings

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.  


If you’re interested in learning more, reach out to us about your situation.  

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.

To start from the beginning of our series:

https://integraspartners.com/owning-real-estate-complements-stock-risks/