NEWSLETTER
Xerxes Nabong, CFP®, CDFA®
Philip M. Maliniak, CRPC®
Nicole Brown-Griffin, CFP®, CDFA®, EA
Aaron Petty, Client Associate
Hampton Roads: (757) 394-3486
Greater Phoenix: (480) 687-9339
Orange County: (949) 660-8869
Wealth Avenue Updates
We are excited to introduce our new team member, provide a briefing on the current market volatility, and update you on recent changes in our investment portfolios. As we pass the halfway point of the year, we’ve included the 2024 Key Financial Data card to assist with your retirement planning, investment contributions, and tax planning.
WEALTH AVENUE ACQUIRES ROYAL FINANCIAL IN NEWPORT BEACH, CALIFORNIA
We are excited to announce that Wealth Avenue has acquired Royal Financial in Newport Beach, California. Mark Royal, who has been a dedicated advisor for 35 years, will be retiring by the end of 2024.
Aaron Petty, currently based in Fort Worth, TX, will be relocating to the Orange County area by the end of the year to become the lead advisor in our Newport Beach office. Aaron will take charge of day-to-day operations and work closely with our clients.
He began his career in 2007 at Ameriprise Financial and recently worked alongside his father at North Star Wealth Strategies in Fort Worth, TX. Aaron is married to Kim and has two sons, Conner and Cooper. We are confident that Aaron’s expertise and dedication will be a great asset to our team and clients.
Additionally, we are now accepting client referrals in the Orange County area. If you know anyone who could benefit from our services, please feel free to refer them to our Newport Beach office.
Please join us in welcoming Aaron Petty to our Newport Beach office and in congratulating Mark Royal on his well-deserved retirement.
Our office contact details are as follows:
Newport Beach/Orange County Office
20101 SW Birch St, Suite 130-D
Newport Beach, CA 92660
Phone: (949) 660-8869
NAVIGATING VOLATILE MARKETS WITH A DIVERSIFIED APPROACH
Current Market Volatility
The first half of 2024 has been marked by significant market volatility, characterized by notable gains and declines across various indices. As we navigate this complex landscape, we remain committed to a diversified investment strategy that balances growth opportunities with effective risk management. In recent weeks, market volatility has increased, trending more to the downside. This has prompted many to ask what actions they should take in response to these developments. Here’s why our approach remains well-suited to current conditions.
Fears of a U.S. recession have been a key factor in the recent global market downturn, exacerbated by Friday’s disappointing July jobs report. Investors are also worried that the Federal Reserve may be lagging in its efforts to cut interest rates to counteract an economic slowdown. Instead, the central bank chose to keep rates at their highest level in two decades last week.
Key Themes for the Remainder of 2024
Despite recent market fluctuations, several key themes continue to shape the long-term market landscape:
- AI’s Productivity Potential: The rapid expansion of AI technology is driving significant productivity enhancements across industries, akin to the internet boom of the 1990s. While this sector’s growth has been a major contributor to recent market gains, it requires careful evaluation to avoid overexposure.
- Strong Consumer Position: Despite record levels of debt, consumers maintain a robust financial position, with high household net worth and substantial cash reserves. This strength underpins ongoing economic resilience, even amid tightening monetary policies.
- Rethinking Portfolio Risk Management: In the current inflationary environment, traditional bond strategies have become less effective, necessitating the exploration of alternative risk mitigation strategies to protect portfolios from potential market downturns.
Market Dynamics and Investor Behavior
Between January and April 2024, the technology sector experienced a 6.6% increase, slightly outperforming the S&P 500’s 6.0% gain. However, from May 1 to June 30, the tech sector surged by 20%, leading to a 28.2% year-to-date return, primarily driven by AI-related companies. This dramatic rise has resulted in inflated valuations without corresponding earnings growth, warranting caution.
The current market is experiencing a FOMO (fear of missing out) effect, with investors hesitant to exit the tech rally despite potential risks. Historically, FOMO-driven rallies can peak after the best gains have been realized, often leading to suboptimal investment outcomes. Without a significant rise in earnings expectations, the tech sector has already priced in substantial positive news, reminiscent of past market corrections.
Economic Insights and Risks
- Labor Market: Since the Federal Reserve’s tightening cycle began, approximately 7.8 million jobs have been added, with significant contributions from the healthcare, leisure, and government sectors. Despite higher interest rates, construction and manufacturing have shown resilience, supported by government policies and globalization.
- Economy: The U.S. economy has demonstrated resilience amid tight monetary policy. However, emerging vulnerabilities suggest the potential need for Fed rate cuts to prevent a recession. While near-term risks are manageable, medium-term prospects remain optimistic.
- Warning Signs: Although the labor market is strong, early warning signs are surfacing. An increase in part-time employment and a slight rise in unemployment in June 2024 indicate potential challenges. Additionally, a decline in ISM Services subindexes and reduced building permits suggest cooling in services spending and a potential drop in construction.
- Recession Risks: As inflation moderates, the risk balance may shift from inflation to recession. Delayed Fed rate cuts could exacerbate recession severity due to the lag effect of monetary policy. However, strong banking and household balance sheets may mitigate potential recession impacts.
- Additional Risks: Corporate defaults remain low despite rapid interest rate hikes, possibly due to increased private debt. The growth of private financing reduces public market exposure but may obscure underlying issues due to lack of transparency.
Stock Market Outlook and Conclusion
The S&P 500’s strong performance, fueled by AI optimism and top stock gains, presents both opportunities and challenges. The U.S. economy has defied recession expectations, supported by consumer spending, private investment, and fiscal policies.
As signs of market cooling continue to emerge, potential Fed rate cuts and moderating inflation could sustain growth. Our strategy focuses on partnering with fund companies and investment management teams that excel in active stock picking, leveraging their expertise to identify opportunities in a dynamic market. Historically, a strong first half for the S&P 500 often leads to continued gains in the second half. Despite recent weeks of market volatility, we reinforce our commitment to a diversified approach that balances growth potential with risk management.
GOALS-BASED INVESTMENT MANAGEMENT
For those of you who have recently met with us, you have heard us discuss our various goals-based investment portfolios. To describe a bit further, a goals-based approach helps investors position their wealth to support key financial objectives throughout their lives. This approach includes three distinct stages: Accumulation, Preservation, and Distribution.
- Accumulation: Our focus for clients in this stage is growth over time, with investment horizons for anywhere from five to 20+ years. Investors can withstand market drawdowns, managing volatility according to their risk tolerance. These portfolios primarily target equity exposure to grow wealth. While there is some presence of fixed income solutions, a portion of the portfolio is allocated to alternative investments to achieve higher returns without taking on as much equity risk.
- Preservation: In this stage, investors focus on safeguarding the wealth they’ve accumulated to support their future distribution needs. While volatility remains a concern, these portfolios lack sufficient time to recover from potential investment losses and should be optimized to protect against absolute loss. This stage is typically suitable for investors 1-3 years from retirement or those in a retirement phase where portfolio distributions aren’t yet needed, or they are waiting to reach the required minimum distribution (RMD) age for mandatory withdrawals. Each portfolio includes active risk mitigation techniques to achieve a smoother path, with reduced participation in both market highs and lows.
- Distribution: Investors focus on generating income and supporting necessary distributions over a long timehorizon. The primary risk is longevity, so portfolios should be optimized to prevent running out of money before the end of the distribution phase. These portfolios balance the income needed with the asset longevity required for lengthy and active retirement years. Cash becomes part of the investment allocation to support monthly distributions, and in this current interest rate environment, cash-equivalent funds with high yields are positioned to provide income for the next couple of years.
Our goals-based strategies aim to avoid emotion-driven investing, offering a balanced yet flexible structure for accumulating, preserving, and distributing wealth to achieve financial security and live life on their own terms.
INVESTMENT PROCESS AND PORTFOLIO UPDATES
As a reminder, we oversee the management of portfolios through investing in various mutual funds, exchange traded funds (ETFs), individual stocks, boutique investment strategists, and separately managed accounts, encompassing large-, mid-, and small-cap stocks representing the United States, developed countries from all over the world, along with some exposure to emerging markets. The allocation of these investments is allocated to align with your risk tolerance and asset allocation objectives.
While the portfolio managers we include in your portfolio consider numerous factors when deciding which positions to hold, our broader management approach focuses on investing with specific goals in mind, rather than speculating on market movements and attempting to time buying and selling.
In times like these… well, when has there ever been a time when there isn’t a news headline that drives emotions with investing? It’s important to remember that we invest your money with a long-term perspective, not for short-term speculation.
Investing is generally a long-term endeavor, aligned with future goals, where risk and return are carefully evaluated among many different options to ensure your money works for you effectively. Speculating, on the other hand, involves placing money with the hope of achieving higher returns in a short period, such as day trading, which involves buying and selling a stock on the same day for a quick return. While we consider expected global and economic outcomes when making portfolio decisions, we do so with anticipated time horizons spanning at least a couple of years.
Since March, we have made several adjustments to our managed investment portfolios at Schwab Advisor Services. We rebalanced portfolios, adding, eliminating, and reallocating positions within our equity positions.
International Stocks:
- Eliminated: First Trust International Equity Buffer ETF (YJUN), First Trust Indxx Global Natural Resources ETF (FTRI), PGIM Jennison Emerging Markets Equity Opportunities mutual fund (PDEZX).
- Reallocated to: Goldman Sachs GQG Partners International Equities fund (GSIMX).
YJUN provided international equity exposure with downside protection but limited upside potential. FTRI, a natural resources fund, had substantial holdings in energy companies. PDEZX targeted emerging markets such as India, Taiwan, China, and Brazil. We consolidated these into GSIMX, which combines the functions of YJUN, FTRI, and PDEZX. Sub-advised by GQG Partners and led by Rajiv Jain, who has over 25 years of international investment experience. GSIMX currently has 12% exposure to energy companies and 25% exposure to emerging markets, with the flexibility to adjust its allocations as opportunities arise.
Additionally, our investment in the Athena Behavioral Tactical fund (ATVIX) is currently invested in EFA, the iShares MSCI EAFE ETF. EFA provides exposure to a broad range of large- and mid-cap stocks from developed markets outside of North America, including countries in Europe, Australasia, and the Far East.
US Large-Cap Stocks:
- Eliminated: First Trust US Equity Moderate Buffer ETF (GAPR).
- Reduced allocation in: Alger Focus Equity (ALZFX).
- Introduced: Horizon Multi-Factor US Equity fund (USRAX), Putnam Large Cap Value (PEIYX).
Like YJUN, GAPR provided equity exposure with downside protection but capped gains, specifically in the US large-cap space. USRAX invests in large-cap stocks with the flexibility to shift into fixed-income securities during market volatility, offering active participation in moving to potentially safer assets. PEIYX focuses on value stocks for potential capital growth and income, with a current yield of 1.44%. Top names within these funds include NVIDIA, Meta Platforms, Alphabet, Berkshire Hathaway, Citigroup, Bank of America, and Microsoft.
US Mid- and Small-Cap Stocks:
- Eliminated: Alger Small Cap Focus fund (AGOZX).
- Introduced: Eaton Vance Atlanta SMID Cap (EISMX), Hennessy Cornerstone Growth (HFCGX).
Alternative Investments, Fixed Income, and Structured Notes
For many of you, we’ve introduced Income-yielding callable structured note(s), transitioning a segment of your fixed income allocation, traditionally managed with bond mutual funds. These notes are configured to distribute monthly income based on the performance of specific underlying indices or stocks, paying out when these indices or stocks hit designated return milestones. As these notes yield their monthly income, we redirect the cash toward your other holdings, both stock and bond investments, amplifying the share count in those respective positions. Current contingent yields from these investments range from 8.5% to 24%.
Looking Ahead
Historically, investing in equities has been a strong long-term strategy for growing wealth. Exposure to fixed income depends on individual appetite for portfolio volatility and short-term cash needs. We rely on our investment partners’ expertise to create long-term value through careful selection of stocks, bonds, and real estate.
We remain cautiously optimistic, acknowledging that current news and market volatility can tempt us to focus on the negative. While it’s tough to see the positive amidst portfolio fluctuations, history shows that markets favor the upside more than the downside. Whether facing a recession or an economic boom, market volatility is likely to continue. Maintaining a steady course has proven beneficial to investors, aligning with the long-term winning strategy.
We will continue to actively manage your portfolio(s), seizing long-term investment and rebalancing opportunities. Our work aims to keep you focused on your long-term goals. We diversify portfolios across regions, asset classes, and spectrums of fixed income and alternatives. Additionally, we tailor these diversified portfolios to your risk tolerance, investment objectives, and time horizon.
Between our annual review meetings, it is crucial to inform us of any significant changes in your work, family, or financial life, as these changes could impact our recommendations and the allocation of investments. As stated on our website, www.wealthavenue.us, our commitment remains to guide our clients financial well-being, so they can live in the moment and in the future.
Your Team at Wealth Avenue,
