Monthly Financial News – February 2024

Monthly Financial News – February 2024

I hope you had a great February.

I wanted to share a few interesting facts and articles I came across over the past month.

Financial News Roundup

  • I Bond Tax Forms: If you sold Inflation Bonds in 2023, make sure to source your 1099 for tax purposes. It is not mailed to you automatically. Here is how:
    • Log into your TreasuryDirect account. Click on “Manage Direct.” Under “Manage my taxes,” select “Year 2023.” Then click on “View your 1099 for tax year 2023.” Print directly from your browser save it as a PDF. If you have trouble, see this video.
  • AI + Real Estate: High mortgage rates are not slowing down the local real estate market. In fact, listings in San Jose area are selling at fastest pace in the US. Many locals feel wealthy, especially with the influx of investment into AI and the stock market at all-time highs. In addition, the majority of AI venture capital investment — about 50%  — occurs in San Francisco + San Jose. Certainly a benefit to the Bay Area.
  • Commercial Real Estate: In 2023 the value of office buildings fell 23%. Other commercial sectors did poorly too, but none quite as bad as offices.
  • Office Vacancy Rate: The root cause for the decline in the value of office buildings is obvious: Not as many people work in them. The office vacancy rate is 19.6%, higher than the previous peak from the late 1980s/early 1990s.
  • More on Offices: In certain cities, the value of office space has fallen a lot more. In San Francisco, office values are down nearly 60%. It’s hard to believe.
  • Best Stocks This Year: Many tech stocks, especially those in the semiconductor industry, are performing well so far this year (as of 3/1).
  • Tech Performance: Along the same lines, here’s a closer look at how eight of the largest and most popular tech/consumer companies have done this year (as of 3/7).
  • Increasing Wealth: As mentioned earlier, many people feel richer today than ever before. The wealth of Americans under 40 grew by 80% between 2019 and 2023. Americans between the ages of 40 and 54 saw their wealth increase just 10%, whereas those over 55 had wealth gains of 30%.
  • Diversification: I speak a lot about the benefit of diversifying. The chart below does a nice job summarizing some of the great brands and companies in Europe:
  • Fees at Private Funds: Thinking of investing in VC, a hedge fund, private equity, or other private investments? Make sure to know the fees. They can easily reach 5% or 6%, a tremendous hurdle.

    “Let’s say you expect the stock market to return an average of 6% annually over the next decade. If you’re considering a private-equity fund that effectively charges 6% in annual fees, do you think its managers can double the return of public markets? Can the managers of a venture-capital fund more than double the return of public markets?

    Maybe.

    But probably not.

    Remember: Future returns are uncertain, while fees are inevitable.”

    Jason Zweig

    The Wall Street Journal

    • Index Funds: S&P Global comes out with an annual report summarizing how active fund managers performed against their investment benchmark. For professionals trying to pick stocks, the results are consistently poor. Over a 10-year period, approximately 90% of funds fail to  beat their benchmark:
      As always, please reach out if you have any questions or would like to connect.
      Monthly News & Financial Updates – January 2024

      Monthly News & Financial Updates – January 2024

      I hope you had a great January.

      I wanted to share a few interesting facts and articles I came across over the past month.

      Financial News Roundup

      • California Quietly Raises State Income Tax Rate to 14.4%. Starting this year, California workers earning more than $145,600 will pay an additional 1.1%.
      • 529-to-Roth Conversions. I’ve had a few questions about converting college-savings accounts to retirement accounts, which became an option in 2024. If you’re curious about the rules, here is a good article on the topic.
      • The Four Phases of Retirement. An interesting and entertaining Ted Talk (13:23).
      • January Effect. This is more of a fun stat, so take it with a grain of salt. When stocks are positive in January, the remaining 11 months of the year are up 12% on average, and positive 86% of the time. Given that we just finished with a positive January, let’s hope this holds true!
      • 49ers: If you’re looking for another reason to root for the 49ers to win the Super Bowl, know this: stocks have done better when the NFC team wins. In addition, the S&P 500 is up 19% on average the past 5 years the Niners won!
      • Top 1%: How much you need to earn to be in the top 1%:

      • Budgeting: I look at how people spend their money all the time. Most people don’t, so I thought sharing this sample budget from a family of four (two working parents, two young kids) earning $400,000 pre-tax could be interesting:
      • Tech Layoffs: Layoffs nationwide remain flat, but there have been headlines recently about layoffs in tech. For a detailed view, head to layoffs.fyi. Here’s the high-level overview:

      Monthly Economic & Market Summary for January 2024

      • Jerome Powell, Chairman of The Federal Reserve, said it best (and succinctly) this week when he said, “This is a good economy.”
      • US GDP grew 3.3% in the fourth quarter of 2023. Expectations were for 2.0% growth, so this was surprisingly good outperformance. For 2023 as a whole, US GDP grew at 2.5%, which is great.
      • All-Time Highs: The S&P 500, an index for large US companies, hit an all-time high in January. This was its first all-time high in two years. Certainly something to celebrate!
      • US and global inflation is on the decline. This is a very welcome change. Of the G10 countries, prices are rising by 5.4% per year, down from a peak of 10.7% in October, 2022. In America, the inflation rate is lower, at 3.3%.
      • Gas prices remain low. The national average of $3.15 is four cents more than a month ago, but 35 cents less than a year ago.
      • The job market remains strong, In January the US added 353,000 jobs, nearly double what was forecast. Unemployment remains below 4%.
      • Incomes are rising, especially among low-income earners.
      • Sentiment Improving: People across the country are slowly coming around to an optimistic view of the economy. An important survey of consumer sentiment among U.S. consumers climbed in January to its highest level since July, 2021.

      As always, please reach out if you have any questions or would like to connect.

      Fourth Quarter & 2023 Investment Commentary

      Fourth Quarter & 2023 Investment Commentary

      In 2023, the economy, stock market, and bond market all performed well.

      This was a very different year than 2022, which had negative stock returns, bond returns, and high inflation. Many economists  predicted those bad times would continue, with a recession in 2023.

      Luckily, that did not happen. The year did get off to a rough start, with three big bank failures: Silicon Valley Bank, First Republic, and Signature Bank. These were three of the largest bank failure in US history:

      What also served as a headwind was the Federal Reserve raising interest rates. They did so four times in 2023 in order to mitigate the risk of further inflation.

      Largely as a result of a declining inflation, resilient consumer demand, and a competitive labor market, no recession occurred. As we’ve seen before, investors who remained disciplined were rewarded with favorable returns.

      Tech of the Year: AI
      A notable theme of the year was AI, which was highlighted by the launch and popularity of ChatGPT. Despite AI’s decade-plus presence (Siri was launched in 2011), this felt like a catalyst for the industry.

      Side bar: It’s interesting to think about what other technology is available today, but not yet at its full potential. 3D printing?

      Back to AI, Nvidia showcased the sector’s strength by being the top performer in the S&P 500:

      Nvidia’s excellent year also serves to highlight the difference between 2022 and 2023.

      Below, we see how “The Magnificent Seven” – the 7 largest stocks in the S&P 500 (all tech) – performed in 2022 (poorly) versus 2023 (very well):

      Fourth Quarter Economic Highlights

      • Economic Growth: The economy continued its impressive performance, exceeding expectations with GDP growth of approximately 2.5% in the 4th quarter, more than double the analysts’ initial forecast.
      • Inflation: The Federal Reserve’s preferred measure of inflation decreased to 2.6% in November, down from 7% in 2022.
      • Interest Rates: Due to declining inflation, the expectation is that interest rate hikes are behind us, with potential rate cuts in 2024.

      Stocks – Fourth Quarter Results:

      • US Stocks: US stocks rose 12.1% during the quarter and 25.9% for the year. November through December was the 12th best two-month period for US stocks since 1950, with a gain of 13.9%. A historically good quarter.
      • International Stocks: Developed international stocks (e.g., Japan, Germany, Australia) rose 11.1% during the quarter and 17.7% for the year.
      • Emerging Markets: Emerging market stocks (e.g., India, Philippines, Brazil) rose 6.5% during the quarter (largely pulled down by China’s weaker performance) and 9.0% for the year.

      With a year of 20%+ returns behind us, I found this stat interesting:

      Bonds
      After a volatile year for interest rates, the US 10-Year Treasury – an important benchmark for lending – ended 2023 almost exactly where it started. Despite briefly reaching 5%, the 10-Year yield started and finished the year just under 4%.

      This decline in interest rates drove the rally in bonds during the quarter.

      Over the past year, hedged international bonds showed the benefits of global diversification, as they outperformed US bonds.

      For investors in tax-sensitive portfolios, municipal bonds have been one of the strongest sectors over the last year, with even better relative results when compared on an after-tax basis.

      Parting Thoughts – Large Tech Stock Valuations
      With all the fanfare around AI, I thought this analysis from Larry Swedroe was informative:

      With an average P/E [price-to-earnings ratio] of 50, the valuations of the Magnificent 7 [the largest 7 companies in the US] are reminiscent of the high valuations of the Nifty 50 and the dotcom stocks just prior to their crashing.

      While not a forecast of a crash, it is a warning that, at the very least, these stocks…are at historically extreme valuations.”

      “For example, Vanguard’s U.S. Total Stock Market ETF (VTI) had a P/E ratio of 22.1, about its average over the last 40 years.

      In contrast, Vanguard’s Total International ETF (VXUS) had a P/E of 12.5, well below its historical average. Similarly, the Emerging Markets Stock Index ETF (VWO) had a P/E of just 11.2.

      Don’t let recency bias keep you from investing in asset classes that have performed relatively poorly, such as international stocks (relative to U.S. stocks) and U.S. small and value stocks (relative to U.S. large and growth stocks). Their valuations are now trading at historically large discounts, increasing the odds that they will outperform going forward.

      As always, please reach out if you have any questions or would like to connect.

      Holiday Cheers & Monthly Market News

      Holiday Cheers & Monthly Market News

      I hope you’re enjoying the holiday season!

      As year end approaches, I wanted to share a few encouraging statistics about the investment world and economy:

      • In November the S&P 500 (large US companies) increased by 8.9%. This was the 18th-best monthly gain since 1950. As a result, the index is close to an all-time high, last recorded in January, 2022.
      • Going back further in time, from December 31st, 2018, to December 12th, 2023 (just shy of 5 years), the S&P 500 has gained 102%. Said another way, US stocks have doubled over the last 5 years. That’s pretty amazing given the two bear markets (2020 and 2022), a worldwide pandemic, high inflation, and rising interest rates. 
      • Also in November, US bonds appreciated by 4.5%. This was their 8th-best monthly gain since 1976.
      • America’s third quarter GDP was revised up from 4.9% to 5.2%.
      • Gas prices are at their lowest level of the year, with a national average of $3.10 ($4.65 in CA).
      • On the employment front, the unemployment rate has been below 4% for 22 straight months. That hasn’t happened since the 1960s. The unemployment rate didn’t go below 4% once during the 1970s, 1980s or 1990s.

      Despite these positive results, many people remain dissatisfied with today’s economy.

      The chart below provides an excellent insight: It shows consumer sentiment by political party. Looking at the drastic swings when a presidential election occurs, it appears that the dominant factor in one’s outlook on the economy is how one identifies politically, and which party occupies the White House:

      Personal Finance News

      Empower surveyed people and asked how much money it would take to feel happy/less stressed.

      The result: Across all income levels, everyone felt that earning more money would make them happier/less stressed. Even the highest earners surveyed, with a median income of $250,000, gave a median response of $350,000. Our desire for more is ever-present:

      What’s the best-performing stock over the past 20 years?

      If you guessed Apple, you’re right! It’s an amazing run, but also interesting to see what other companies are on the list. I don’t think many people would’ve guessed Monster Beverage would be #2:

      Speaking of investment returns, the image below from Visual Capitalist does a nice job showing how long it takes to double your money:

      This research about the Safe Withdrawal Rate from your portfolio in retirement is interesting.

      The green section across the top represents the safe withdrawal rate, where you would not have run out of money in nearly all historical periods. But as you move down the table – by increasing your withdrawal rate  – you become more likely to run out of money. So when you have a high withdrawal rate you actually need to take more risk to accommodate this higher need from your portfolio.

      Interest rates are on a lot of people’s minds these days. Recently the Federal Reserve decided to hold them steady, and it’s projected that they’ll be reduced over the next few year. Here are the current projections for where they’re headed (take these with a grain of salt, as these projections move around a lot):

      I hope you found these as interesting as I did.

      As always, please reach out if you have any questions or would like to connect.

      Happy Holidays!

      Monthly News and Halloween Updates!

      Monthly News and Halloween Updates!

      I hope you had a great Halloween!

      My wife and I took our daughter, Penny (now 19 months old), trick or treating.

      She dressed up as her favorite character, The Very Hungry Caterpillar! We dressed up as her sidekicks, the food she ate. I was a watermelon and my wife was a lollipop.

      We all had a great time, with Penny enjoying her first-ever candy bar (and ensuing sugar rush).

      Onto the finance world, I came across a few articles and charts this past month that I found interesting and wanted to share.

      Real Estate

      I’m giving real estate its own section since there is so much interesting data. Here are a few charts that stood out.

      Home sales are on pace for their lowest annual total since 2008: 

      Supply (aka inventory) is low. There are fewer homes for sale today than any other time on record (going back to 1999):

      Given that mortgage rates are around 8%, and prices remain high as a result of low inventory, home affordability metrics are awful.

      The median American household would need to spend about 44% of their income to afford the median priced home, a record high:

      And lastly in real estate news, the way realtor commissions are paid may change in the next few years. The results of a recent verdict between the National Association of Realtors (NAR) and a group of sellers stated that sellers would no longer be required to pay the buyers’ agents commission. Agents would then be free to set their own commission rates. The NAR has promised to appeal, and the Department of Justice would need to edit the current rules, so we’ll see where this ends up.

      I hope you found these helpful! As always, please reach out if you have any questions or would like to connect.