VWG Wealth Management 2024 1st Quarter Review

By VWG Wealth Management on April 9, 2024

Executive Summary

• Expectations for a Federal Reserve ‘pivot’ to begin the year in earnest were met with a series of
  hotter than expected inflation and employment reports. The U.S. economy remained strong,
  with the latest GDP figures posting an annualized growth rate of 3.4%.
• In response, bond yields rose as markets contemplated that interest rate cuts might not occur as initially forecasted. The 2-year U.S. Treasury Note finished the quarter yielding 4.62%, 37 basis points higher from its start. The Bloomberg U.S. Bond Aggregate Index fell 0.7% for the quarter.
• U.S. stocks responded positively, with the AI secular growth theme and resilient corporate profit margins providing additional tailwinds. The S&P 500 Index rose persistently throughout the quarter, to mark five consecutive monthly gains. The large stock benchmark increased 10.4% for the quarter, hitting a record high. International stock markets also fared well with Europe’s STOXX 600 Index and Japan’s Nikkei 225 Index also hitting record highs.
• VWG is constructive on the current investment landscape. We are moderately positioned in our long-term portfolios seeking capital appreciation. Consensus thought is that conditions are
  normalizing, the Federal Reserve’s ‘heavy lifting’ has been done and monetary conditions will ease over time.
• However, there are many potential perils that could disrupt current benign conditions. Seen or unseen, these are always present, and we must remain vigilant. The macroeconomic
  environment, and the deployment of investment capital within it, are highly complex adaptive systems. This mandates that we construct and maintain balanced, diversified portfolios.
  Adequate levels of cash and short-term liquid instruments should be maintained to help protect against unexpected events and emergencies.
• Legendary investor and Berkshire Hathaway partner Charlie Munger passed away late last year. He left a rich legacy of observations and teachings which deeply resonate with the VWG team. We hope to emulate many of these in our business activities, and in our client and personal relationships.

Review of the Markets

2024 began with ebullience in both the bond and stock markets over the anticipation of Federal Reserve monetary easing in response to their observations of subsiding inflation and a moderating economy.
Some observers predicted as many as six rate cuts to occur throughout the year.

However, as the 1st quarter progressed, the glidepath of these expected developments became less certain. The U.S. economy demonstrated unwavering strength, with the latest gross domestic product (GDP) figures reporting an annualized growth rate of 3.4%, well ahead of consensus expectations. U.S. nonfarm payrolls, consumer spending, capital expenditures all remained firm. Inflation, although much lower from the mid-2021-2022 surge, appeared to be sticky. The Fed even raised its 2024 forecast for core inflation, from 2.4% to 2.6%. Chairman Jerome Powell’s comments at the March FOMC meeting acknowledged the resilient economy and labor market in taking a cautious stance. This suggested that widely anticipated rate cuts may not occur as initially forecasted. Ned Davis Research contemplated the unusual economic progression over the past two years by surmising, “2023 was the year of the recession that wasn’t, and 2024 may be the year of the rate cuts that aren’t.”

In response, bond yields rose. The 2-year U.S. Treasury Note finished the quarter yielding 4.62%, up from 4.25%. The yield of the 10-year U.S. Treasury Note rose to 4.20%. The Bloomberg U.S. Bond Aggregate Index fell 0.7% for the quarter. High yield bonds, more sensitive to economic expectations and credit quality, outperformed. The Bloomberg Barclays High Yield Bond Index increased 1.6%.

Projected economic cooling could still be on the way. Job openings declined (but not to pre-COVID levels) and the unemployment rate rose from a low of 3.7% to 3.9%. Wage increases appeared to
moderate. Goldman Sachs’ chief economist Jan Hatzius wrote that “the recent growth and employment numbers have reinforced our view that the supply-demand imbalances in the economy are abating.” Global monetary easing is under way. In March, the Swiss National Bank became the first G10 member to cut rates. Goldman Sachs expects that the European Central Bank (ECB), Bank of England and the Bank of Canada will begin cutting rates over the coming three months.

Equities responded well to this set of inputs. The artificial intelligence (AI) secular growth theme and Q4 corporate profit margins provided additional tailwinds. The S&P 500 Index added to November and
December’s strong returns with three consecutive monthly gains. It returned 10.4% for the quarter, reaching a record high. Participation of industry sectors within the index broadened, as financials,
industrials and energy joined the already strong technology group. Breadth is a signal of market health. Smaller stocks gained with the benchmark Russell 2000 earning 5.0%.

Internationals equity markets also performed well in the 1st quarter. Europe’s broad STOXX 600 Index hit a record high, and Japan’s benchmark Nikkei 225 Index surpassed its previous record high reached in 1989. The MSCI EAFE Index increased 6.0% in the quarter. The MSCI Emerging Markets Index, partially held back by struggling China, improved 2.2%.

Anticipating both looser financial conditions and moderating inflation, commodities were mixed in the 1st quarter. Gold broke out, hitting an all-time high. The NYMEX Gold continuous futures contract gained 7.4% Despite record U.S. production, global crude supplies were measured while demand remained firm. The NYMEX West Texas Intermediate Crude Oil continuous futures contract rose 13.9%. At the same time U.S. natural gas prices fell to their lowest price in inflation-adjusted dollars since at least 1997, according to data from Refinitiv Eikon.

Lessons from Charlie Munger

Charlie Munger passed away in November, just 33 days before reaching his 100th birthday. He was a legendary investor who, in partnership with Warren Buffett, helped build Berkshire Hathaway to its present dominance. As Mr. Buffett wrote in this year’s annual letter, “in reality, Charlie was the “architect” of the present Berkshire, and I acted as the “general contractor” to carry out the day-to-day
construction of his vision.”

Charlie was far more than merely a great investor. He was a polymath, deeply steeped in history, psychology, science, mathematics, philosophy, and human nature. He leaves behind a rich legacy and a wealth of instructive observations and lessons, delivered with what journalist Jason Zweig termed “refreshing candor and moral clarity.” His profound insights, marked by wit, wisdom, and an unyielding curiosity about the world, offer timeless guidance.

Photograph courtesy of CNBC

Here are a few of Charlie’s teachings that particularly resonate with us. VWG strives to emulate these in our client relationships, the development of our team, our investment process, and in our family and personal relationships. We hope you find these as valuable as we do. For much more, we recommend searching for interviews and articles on the internet and reading the excellent “Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger.”

Commit to Lifelong Learning: Charlie had a relentless, passionate drive for learning, and an insatiable curiosity about the way things work and why things are happening. “Nothing has served me better in my long life than continuous reading and learning.” He believed that “the acquisition of wisdom is a moral duty.”

Build a Latticework of Mental Models: Charlie stressed the importance of multidisciplinary learning, pulling the main ideas from disparate field into “mental models.” He then connected these mental models into a latticework where ideas could interact with each other. Munger argued that this was a superior way to learn, and he credited it as a key factor in enhancing his mental clarity.

Embrace Contrary Thinking: “You should readily entertain the opinions of others. Practice contrary thinking and be ready to change your mind. It is a great gift to develop to get really good at destroying your own favorite ideas.”

Acknowledge the Limits of Your Knowledge: One of Munger’s most quoted insights is, “Knowing what you don’t know is more useful than being brilliant.” He warned that “overconfidence can do more harm than good when you’re dealing with highly complex adaptive systems wherein everything is interreacting with everything else.”

Never Underestimate the Power of Incentives: Charlie recognized that self-interest and incentives significantly drive human behavior. He often stated, “Show me the incentives, and I’ll show you the
outcome.”

Invest in High-Quality Businesses: Munger’s investment philosophy was simple yet profound: “A great business at a fair price is superior to a fair business at a great price.” He argued for long-term ownership in companies with skilled and trustworthy management, that built and protected enduring competitive advantages.

Guidance to Young People Embarking on a Career: “Don’t sell anything you wouldn’t buy yourself. Don’t work for anyone you don’t respect and admire. Work only with people you enjoy working with.” He always implored moral integrity. His marching orders for managers and employees of companies he was involved with were, “lose money for the firm and I’ll be understanding. Lose a shred of reputation and I’ll be ruthless.”

Charlie’s Keys to Leading a Happy and Productive Life: “Have a sense of humor, work hard, surround yourself with people you admire, and avoid self-pity and resentment. Spend less than you earn. Have low expectations. Be willing to learn from your mistakes and anticipate difficulties which will inevitably appear.”

How to Have Great Business Partners and a Wonderful Marriage: “I have been blessed with some very remarkable partners in life and I’ve been asked, ‘How do you get a marvelous partner?’ My response is – you deserve a marvelous partner. It works in marriage too, a very simple formula. To get what you want, you have to deserve what you want.”

Portfolio Positioning

VWG Wealth Management is favorable towards the current investment landscape. We are moderately positioned in portfolios seeking long-term appreciation. The consensus remains that the Federal Reserve’s heavy lifting is done, and monetary conditions will ease over time. The economy appears to be on sound footing.

We don’t believe that U.S. equity markets are overly frothy despite some pockets of exuberance. However, it must be noted that the recent performance of the S&P 500 Index, with a gain of almost 25% over the past five months, marks one of the five best such periods in its history. Some pause or even a typical 5-7% pullback could be expected and might provide a healthy ‘digestion’ period to fuel further gains. A measured approach is called for those needing to increase exposure. As Charlie Munger has wisely instructed, we recommend maintaining a long-term focus, investing in quality companies and entrepreneurial strategies run by skilled, principled managers.

There are certainly potential threats looming that could alter the present benign picture. Geopolitical tensions and conflict are present in many parts of the world. Countries that cumulatively produce over
40% of global GDP will hold head of state elections in 2024. The runup to this fall’s U.S. presidential election poses to be highly volatile, regardless of the ultimate outcome.

The fifteen years of ‘free money,’ zero-interest rate (ZIRP) and quantitative easing policies enacted by global central banks following the great financial crisis (GFC) appear to be over. If this is the case, interest rates are expected to be higher for longer, even if economies cool. This potential ‘regime change’ could have significant effects on corporate balance sheets, capital formation and market structures over the coming years. Lastly, the U.S. is running a budget deficit of greater than 7% of GDP with near full employment. This cannot persist indefinitely without destabilizing our economy. Regretfully, the current tribalized constituency of the Congress, termed by Piper Sandler’s Andy Laperriere as displaying “no garden-variety of dysfunction,” appears unwilling to seriously address it.

The bottom line is that our macroeconomic world, and the efforts to prudently deploy investment capital within it, are highly complex adaptive systems with numerous interacting inputs. No one can
consistently predict these, and it could be perilous to do so. This is no place for overconfidence. As such VWG must diversify our portfolios. Allocating some portion of these to cash and liquid short-term investments is essential. A cushion for unexpected events and emergencies, both at our client’s personal levels and at the broad investing level, are mandated.

As always, please reach out to your VWG advisor should anything significant change in your current financial situation, or with future goals and plans you are contemplating. It may be wise to update your financial plan to evaluate the potential effects of these situation changes. Funding, taxation, and asset titling are some of the key factors that should be considered. Depending on how significant,
modifications to your portfolio allocation and strategy over time may be called for.

We will look forward to speaking and meeting with many of you over the coming few months.
Best wishes for an active and energizing spring season!

Regards,

VWG Wealth Management
Suzanne, Ashley, Rashmi, Kay, Brandi, Lynette, Ona, Michelle, Lilly, Ryan, Ryan, Ryan, Justin, Elana, John, Rick and Jeff

Who we are

* All stated index returns are as of 3/28/2024 unless otherwise indicated.

* Index Data and Charts Sourced from FactSet Research, Morningstar and Bloomberg.

VWG Wealth Management is a team of investment professionals registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC.  Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

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The information provided has been obtained from sources not associated with Hightower or its associates. All data and other information referenced herein are from sources believed to be reliable, although its accuracy or completeness cannot be guaranteed. Any opinions, news, research, analyses, prices, or other information contained in this report is provided as general market commentary, it does not constitute investment advice. VWG Wealth Management and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. 

This document was created for informational purposes only; the opinions expressed are solely those of VWG Wealth Management, and do not represent those of Hightower Advisors, LLC, or any of its affiliates.