Investment Management - First Quarter 2024

From One Extreme to the Other

Looking back at the pandemic and post-pandemic environment, the economic impact has been unprecedented. Inflation, monetary tightening, supply chain disruptions, rising interest rates, massive fiscal stimulus, social disruption, and geopolitical events have created incredible uncertainty for investors. Entering 2023, recession fears dominated the market resulting in reactive decision making. Ironically, fear of a weak economy transitioned in the summer months to concern that economic growth would be too strong. This year began with expectations of 6 to 7 interest rate cuts to avoid recession. Now, economic strength suggests few to no rate cuts and possible tightening of monetary policy by the Federal Reserve (“Fed”). Investor confidence in the economy and the direction of interest rates have been swinging from one extreme to the other.

Confidence is not always mentioned directly, though overconfidence (greed) or lack of confidence (fear) influence investor behavior. Behavioral finance studies and crowd psychology acknowledge that investors do not always act rationally.ⁱ As an example, sentiment indicators are an attempt to gauge how optimistic or pessimistic investors currently feel.ⁱⁱ The Investor Intelligence Bull/Bear ratio is one sentiment indicator that studies over one hundred independent market newsletters and assesses each author’s current stance on the market.ⁱⁱⁱ In October 2022, this ratio touched the lowest level since the Great Financial Crisis of 2007-2009. Extreme readings tend to signal that emotion has likely replaced logic. To quote Warren Buffet, ”Be fearful when others are greedy, and be greedy when others are fearful.” This ebb and flow of confidence directly affects an individual’s risk tolerance, comfort level, and therefore, performance.

Currently, investors are experiencing a good amount of confidence as the S&P 500 index rose 10.56% in the first three months of the year, achieving numerous new all-time highs in the process. Mid and small capitalization stocks, represented by the S&P 400 and S&P 600, returned 9.95% and 2.46%, respectively. International stocks, tracked by the MSCI EAFE, rose 5.78%.

Performance^iv for various indices for the three-month (not annualized), one-year, three-year, and five-year periods appears below:

Bond Indices

Equity Indices

 Looking at the market, mega-cap technology and semiconductors stocks continued to lead broader indices higher. These companies are associated with artificial intelligence (AI), which represents vast economic opportunity. We are in the early AI investment phase, however, the long-term opportunities generate excitement for investors. Occasionally, the story overwhelms fundamentals, as greed causes investors to ignore valuations.

Concurrent with the equity rally, valuation multiples expanded for many large corporations. The index’s forward price-to-earnings ratio rose from 19.6x to 21x by the end of the quarter, while the 30-year average is 16.6x. Elevated levels of valuation increase the potential for declines, especially during earnings season.

Consensus expectations forecast the U.S. economy to expand by approximately 3% this year. The labor market remains tight, with healthy new job creation, along with softening year-over-year rises in hourly wages. Tailwinds from rising business investment and government spending packages provide additional support to growth. Recently, the Institute for Supply Management’s Manufacturing Index also shows expansion in the manufacturing sector. In March, production expanded for the first time in 17 months. While the outlook is positive, lower income households are not doing as well. Banks are reporting higher delinquencies for credit cards and auto loans.

Another positive factor is lower inflation, which is decelerating around the world. After the Fed’s December meeting, Chairman Jerome Powell delivered a dovish message during his press conference.^v He noted progress against inflation but discussed the importance of being data dependent due to uncertainty over economic growth. The dovish-tilt surprised investors since the Fed’s prior message was higher rates for a longer period. Unfortunately for Chairman Powell, over the last three months, the decline of specific inflation components has abated. March’s Consumer Price Index was hotter than expected, with year-over-year inflation rising at 3.5%, with service sector inflation buoying the data. As a result, market expectations for the number of rate cuts have steadily declined to one (25 basis point) cut, currently. As experienced in the 1970s, lowering short-term interest rates too soon can reignite an already sticky inflation problem.

It is important to remember there will always be concerns for financial markets. The current geopolitical situations in Ukraine and the Middle East have caused spikes in volatility and commodity prices. Long term interest rates have been rangebound (between 4% and 5%) and an upward breach of that range could reignite concerns over regional bank balance sheets, U.S. debt, and deficit spending. And lastly, there are always unknown unknowns.

Broadly speaking, our equity portfolios have strongly participated in the recent uptrend relative to the WFS Benchmark. We remain tactically overweight domestic, large capitalization equities, with a bias towards growth over value, and underweight international and emerging market exposure. Equity allocations remain fully invested to target, with equity allowed to drift above or below, depending on each client’s individual circumstances. Within the fixed income allocation, bond ladders are benefitting from recent maturities being reinvested at higher interest rates. We are realizing capital losses in taxable accounts (where available) from low-coupon bonds, offsetting other realized gains, and reinvesting in securities with higher coupons.

At West Financial, we remain focused on our long-term, diversified investment strategy. Capital markets are discounting mechanisms, and they are efficient to an extent, assuming participants are all acting rationally. Warren Buffet understood the importance of independent thought and analysis - “The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.”^vi While there will always be forecasts and a tango of talking heads on TV, we stay focused on economic data and market fundamentals, and attempt to be opportunistic when others are too greedy, or too fearful.

We would like to congratulate Glen Buco and Victoria Grossmann Henry for their recognition as Top Fee-Only Financial Planners by Washingtonian magazine in January.^vii A second recognition to be proud of is West Financial being named by InvestmentNews as one of the “Best Places to Work for Financial Advisors.” ^viii

In March, we welcomed Tenzin Brooks to our client service team. Tenzin earned a BS in Business Administration from George Washington University. Tenzin brings over 25 years of success in the banking industry, with experience in client services, consumer lending, and process management. In April, we also welcomed Ryan Inverso to our client service team. Ryan studied Business and Computer Science at Devry University. Prior to joining West Financial Services, Ryan has been in the financial world for over 13 years.

In other news, our own relationship manager, Laura Nash, CFP^®, presented a webinar on the ever-popular topic of Social Security. If you missed it, you can watch a recording on the Event page of our website at westfinancial.com/events/understanding-social-security-decisions-optimizing-your-benefits. In March, we were pleased to have Bradford Pineault, CFA, Vice President of Capital Market Strategy at Fidelity Investments return for a fireside chat with our CIO, Glenn Robinson, CFA on current events and how they affect the markets.

-------------------------------------------------------------------------------------------

Our annual disclosure documents, Client Relationship Summary (Form CRS) and Form ADV Part 2A, have recently been filed with the SEC. There have been no material changes to our Form ADV Part 2A and Form CRS since the filing of previous amendment on July 11, 2023, and March 29, 2021, respectively. Our current Form CRS and Form ADV Part 2A are available on our website (www.westfinancial.com), the SEC’s website (https://adviserinfo.sec.gov), and can be provided to you in hardcopy form upon request. We have provided performance numbers for the quarter, one-year, three-year and five-year periods, where appropriate.

Thank you for your continued confidence in West Financial, and please do not hesitate to refer friends, family, or co-workers who you feel may benefit from our services.

Brian L. Mackin, CFP®	Glenn Robinson, CFA
President	Chief Investment Officer

ⁱ https://www.investopedia.com/terms/b/behavioralfinance.asp

ⁱⁱ https://www.investopedia.com/terms/s/sentimentindicator.asp#:~:text=Sentiment%20indicators%20look%20at%20how,help%20forecast%20investors’%20future%20behavior

ⁱⁱⁱ https://www.investorsintelligence.com/x/us_advisors_sentiment.html

^iv Each of the S&P 500 Index, the S&P 400 Index, the S&P 600 Index, the MSCI EAFE Index, the ICE BofA 1-5 Year Index, the ICE BofA 1-10 Year Index, the ICE BofA 1-12 Year Municipal Bond Index, the Dow Jones Industrial Average, and the NASDAQ Composite (each, an “Index”) is an unmanaged index of securities that is used as a general measure of market performance. The performance of an Index is not reflective of the performance of any specific investment. Each Index comparison is provided for informational purposes only and should not be used as the basis for making an investment decision. Further, the performance of your account and each Index may not be comparable. There may be significant differences between the characteristics of your account and each Index, including, but not limited to, risk profile, liquidity, volatility and asset comparison. The performance shown for each Index reflects no adjustment for client additions or withdrawals, and no deduction for fees or expenses. Accordingly, comparisons against the Index may be of limited use. Investments cannot be made directly into an Index.

^v https://www.federalreserve.gov/monetarypolicy/fomcminutes20231213.htm

^vi https://jamesgeary.com/aphorisms-by-warren-buffett/

^vii To arrive at the names of the area’s top financial advisers—the fee-only financial planners, fee-based advisers, estate attorneys, tax accountants, and insurance advisers marked with a “Top Financial Advisor” tag—the Washingtonian distributed surveys to hundreds of people who work in the local financial industry, asking them whom they would trust with their own money. The Washingtonian also did their own research, consulting industry experts and publications. The “Top Financial Advisor” names on this list are the people who received the strongest recommendations.  Firms do not pay a fee for employees to be considered or placed on the final list of “Top Fee-Only Financial Planners” or “best adviser.”

^viii In order for firms to be recognized for InvestmentNews’ list of the Best Places to Work for Financial Advisors, InvestmentNews and Best Companies Group invite firms to complete a survey, which asks firms to explain their various offerings and practices. Any firm recognized must satisfy the following criteria: 1) be a registered investment adviser (RIA), affiliated with an independent broker dealer (IBD), or a hybrid/dually registered firm affiliated with an IBD and doing business through an RIA; 2) be based in the United States; 3) have a minimum of 15 full- or part-time employees working in the US ; and 4) be in business for a minimum of one year. Once the survey is completed, employers are invited to complete an in-depth questionnaire and employees are given the opportunity to offer their feedback by completing a company-wide survey. Once both portions of the assessment are complete, the InvestmentNews team analyzes the data and determines whether the firm will be named one of the Best Places to Work for Financial Advisers.  Firms do not pay a fee to be considered or placed on the final list of Best Places to Work for Financial Advisers. The only cost is to allow participating firms to view the employee feedback reports.

West Financial Services, Inc. (“WFS”) offers investment advisory services and is registered with the U.S. Securities and Exchange Commission (“SEC”). SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the firm has attained a particular level of skill or ability. You should carefully read and review all information provided by WFS, including Form ADV Part 1A, Part 2A brochure and all supplements, and Form CRS. The information contained herein does not constitute investment advice or a recommendation for you to purchase or sell any specific security. You are solely responsible for reviewing the content and for any actions you take or choose not to take based on your review of such content. 

This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Certain information contained herein was derived from third party sources as indicated. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third party source and not to WFS.

Certain statements herein reflect projections or opinions of future financial or economic performance. Such statements are “forward-looking statements” based on various assumptions, which may not prove to be correct. No representation or warranty can be given that the projections, opinions, or assumptions will prove to be accurate.