Navigating Uncertainty
4th Quarter 2024 Commentary • Kori Allen, CFP®
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” —SETH KLARMAN
We’re swimming in oceans of data, entertainment, opinion, information and disinformation. To keep our heads above water, it takes discipline and humility to question the content as well as our own interpretation and biases. We are all tribal human beings at our core, and in the most primal sense activated first, by fear. Our data-driven world gives the illusion that if we can find a storyline to help us make sense of the world, then we have a better chance at safety.
As Helen Keller said, “Security is mostly a superstition. It does not exist in nature… Avoiding danger is no safer in the long run than outright exposure. The fearful are caught as often as the bold. Faith alone defends.”
Where do we put our faith in a time where almost equally half of our country is fearful for the future of our democracy and financial stability and the other half are euphorically optimistic about both? As investment advisors, we remind ourselves of basic principles and guardrails established at more benign periods.
First, we remember that the adage, “this time is different” is rarely true. Simplistically, markets reflect underlying companies or entities that supply goods and services to consumers (individuals, businesses, governments). Consumers have needs that range from basic to frivolous. Needs and desires cycle, creating expansions and contractions in economies, industries or business profit margins. Foundationally, we have collective data—history—expressed numerically, that illustrate the results of this economic activity and consumption. From the past, we extrapolate the future. Many financial professionals have faith in the efficient market hypothesis. It is a belief that, ultimately, asset prices reflect all available information. However, market prices also reflect the psychology of its participants at any given time. “This time” is rarely different because the same multitude of elements are converging and diverging. The combination might be unique, but the elements rarely change. People cycle between fear and greed, optimism and pessimism; economies expand and contract.
When investing, we aim to help our clients reach their goals with the least amount of risk. We account for time horizon, temperament and cash flow needs. From planning, discussions, and experience, we select a general asset allocation to reflect these criteria. This is tailored to the individual, NOT what is happening in the markets. We invest a portion in stocks/equities, because this asset class is usually expected to grow above the inflation rate, over time. Oftentimes, we are investing for a distant future, and preserving purchasing power is necessary to reach the unique goals. Planning and asset allocation is our bedrock when the psychological waters become excited or murky. These waters are churning.
The markets had a sigh of relief last quarter, as the presidential campaign season ended. Markets usually rise after an election simply because the distraction of a relative uncertainty is resolved.
Throughout 2024, US large companies, using the S & P 500 as a measure, especially the top 7–10 stocks, dominated returns. The magnificent 7: Nvidia, Apple, Meta/Facebook, Alphabet/Google, Amazon, Microsoft and Tesla, each rose, ranging from 13% to 178%. These stocks plus another share class of Alphabet, Broadcom and Berkshire Hathaway B shares, comprised nearly 39% of the S & P 500 at the end of the year. When you hear or read that “the market” is over-valued, it is primarily this group. Their dominance in the index and the valuations of each individual company discolors market valuation, perception and emotion. Price-to-earnings ratios are one of the general metrics people use to determine if a stock is over, under or fairly-valued. The following graph, from our friends at J.P. Morgan Asset Management, quickly puts the US stock market in perspective.
Remember though, that one of our over-arching principles is to balance risk with reward. Of the many risks faced when investing, two are and have been top of mind: concentration and political risk. The chart above illustrates that concentration risk well. Our economy is not simply fueled by artificial intelligence (AI) and its promise, and if the sector or individual companies falter or deliver negative earnings surprises, the stock or stocks could fall from their lofty perch.
Political risk is also on the forefront. The United States has been highly regarded for investment due to relatively predictable governance. Bills and policies take time to wind through a deliberative, open process. Our press has been free. During and post-pandemic, our government decisively enacted multiple stimulus programs that have fueled the past few years of economic and stock market growth and, has set us up for more. We have been leaders. However, campaign rhetoric and departure from past norms and standards has us watchful. Influence of non-elected, extraordinarily wealthy individuals, especially those from the “tech” world, on our democracy and public discourse, challenges our past confidence in predictability.
We have always preferred diversification over concentration and it’s a vital component in pursuing a return while managing for risk. This includes diversifying between asset classes such as stocks and bonds, but also across industries, countries and regions. Our portfolios are constructed following a much broader universe and follows the index: ACWI, all country world index. Our portfolios still have about half of equity holdings in the US, but diversifying the country mix as well as the individual stocks remains a core principle. Maintaining a global strategy helps us temper political risk by reducing the influence of one country’s policies and tax codes over another.
The following chart helps illustrate how a portfolio mix between stocks and bonds can provide similar results with less risk. This chart depicts the United States only, yet drives home the point that diversification can smooth out the investment ride, over time, reducing volatility, but reaching the desired destination with a similar result.
You’ll note that the bars, in the shorter time frames, straddle both positive and negative results. For example, in one year returns, the stock market (green) grew at 52%, in the best year and, also lost 37%, in the worst year, between 1950–2024. Your time horizon, goals and temperament will be unique to you, but over longer periods of time, risk and reward is moderated with similar results.
In our conversations we like to revisit your time horizon and temperament in the context of your long-term stated goals. At this time, we are reminded that our core investment principles exist to help eliminate our collective short-term anxieties or euphoria in our decision-making. Our target asset allocation assigned to support your goals is stated on your quarterly reports. This is our map and if we are tempted to off-road, we will revert to your goals and time horizon to ground us all as we navigate these times.
The views expressed represent the opinions of Pearl Wealth, LLC as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. www.adviserinfo.sec.gov.
Past performance is not a guarantee of future results.