Expectation vs Reality 

One year ago I wrote a letter titled The Little Economy That Couldn’t because of the widespread expectation the economy was slipping into recession. I quoted a Forbes article stating we were facing, “…the most anticipated recession of all time!” 

Looking back on the year, it reminds me of the “expectation vs. reality” memes showing how ridiculous our expectations can be compared to reality.

In response to the pessimism last year, I recommended basically doing nothing and making no changes to our investments. That advice was not just a one-time thing, it’s a rule-of-thumb for us. We make no large changes to portfolios because of wide spread expectations or expert predictions. 

Why? Because you never know. You never know what the year will be like. You never know if a disaster awaits us or what blessing a technological advance could bring (think AI). You never know if our government will make decisions that will help or hurt the economy. You never know who will be President. You never know if the world will shut down because of a pandemic. You never know if interest rates will go up or down. You never know if taxes will go up or down. You never know if the stock market will go up or down. You never know if the economy will grow or if we will sink into a recession. You just never know!

We never know what will happen, but we DO KNOW that (on average) 3 out of every 4 years are good for the economy and stock market. Because of this we stay invested.

Now, I don’t usually toot our own horn, but I’m willing to make an exception this time (*toot toot*)! There was no recession last year, the stock market was up, and our accounts did well as a result. We are very thankful we don’t panic and sell all stocks based on expectations.

Our aggressive Growth Portfolio led the way thanks to computer chip company Nvidia, but most everyone invested in stocks did well last year. 

Last Call Before Rates Fall

This Christmas, my three older brothers and I went out to a restaurant in Salem and had such a good time we didn’t realize we were the last ones there. The poor hostess had to give us the, “Ok guys, the party’s over, we’re all trying to go home. Last Call!”

The experts are saying the same thing. The party’s over in Certificates of Deposit (CDs), Treasuries, and other fixed investments. It’s last call before rates fall!

Interest rates have been climbing for several years as Jerome Powell and the Federal Reserve dealt with high inflation. Now that inflation is less of a problem, it is assumed rates will begin to decrease this year. We’re already seeing that in some of the fixed investments we invest in.

The CDs that were offering approximately 5% per year are now only offering 4%. Treasuries that were getting 5% are now closer to 4%. Insurance companies that were offering 6%+ are now down in the 5% range. If the prognosticators are right and rates do fall, then those percentages are likely to keep falling. 

To keep this in perspective: a 4% CD and a 5% annuity are still relatively high compared to the last 20 years. So it’s still a good time to lock in a guaranteed rate if you have safe money you want to earn interest on, but the clock is ticking. The longer people wait, the lower the rate may be.

We’ve been locking in these high rates using CDs, Money Markets Funds, and insurance products wherever we can.

NOT Last Call for Stocks

Because rates are likely to fall this year, we are optimistic about the economy in 2024, and believe it’s NOT last call for stocks. Here’s why:

Lower rates should help the housing market. Housing will likely see increased activity after a dismal 2023. From a CNN article, home sales last year dropped to the lowest level in 28 years, since 1995! If you see a mortgage broker or realtor, you should give them a hug and tell them brighter days are ahead.

Lower rates should help development and investment. Projects that have been on-hold because of interest rate sticker shock should see some relief. Hopefully these projects may be able to move forward again. That’s good for a lot of people. From the banks that are loaning money, to the workers moving the dirt, to the companies employing the workers to build the developments. 

Lower rates should help companies invest. Companies that have been holding back on borrowing to expand and grow their business should be freed up to do so as soon as the rates allow. This will give the economy a boost from increased spending.

Lower rates should help the stock market. Financial analysts that value stocks use current interest rates in the calculations. If rates continue to fall it should make stock valuations more attractive, which should lead to higher stock prices. That’s good news for those of us that own stocks.

Finally, when discussing 2024, we must discuss the elephant (or donkey) in the room.

2020 Rematch

We watched the fireworks play out in New Hampshire and now it’s all about South Carolina. DeSantis is out and the gloves are off between Trump and Haley. Unfortunately for Haley, Trump looks to have the nomination in the bag. So, despite 70% of the public not wanting a rematch, it appears very likely that’s what we’re getting.

So the question is, will the election drama affect our portfolios?

Contrary to 49% of opinions, election years usually don’t affect portfolios much.

A recent poll was done with people owning 250k in investments or more, and Matt Sommer from MarketWatch says, “more investors say they are very concerned about the impact the 2024 presidential election will have on their portfolios (49%) than are very concerned about the impact of inflation (35%), recession (29%), or higher interest rates (27%).”

But once again, expectation is very different from reality. The stock market has shown very little difference between election years and non election years in the past 90 years. 

“Looking back at the performance of the S&P 500 from 1937 to 2022, for example, shows that the average annual return is 9.9% during presidential election years and at 12.5% during non-election years.”

So, with that in mind, we are expecting the performance of the stock market in 2024 will be based on the fundamental factors mentioned above and not just the election. Thankfully. 

20 Years and Counting

As we tell people how wonderful we are (tongue in cheek of course), SMB Financial continues to grow. We manage over $150 million in assets now! This is a big milestone and I’m incredibly proud of where we’ve come over the last twenty years. When I joined Bruce (my dad) in 2005 we managed only $14 million. 

That’s quite a bit of growth over the years thanks in a big way to Jeremiah Forrister, who has been with us now coming up on seven years. I can’t tell you how great it is to have him here. Jeremiah has streamlined operations, handled the administration, and as a Certified Financial Planner, has his own clients and investments he manages. 

With all that we needed to hire again, and did so at the beginning of the year. Lindsey Cason is from the great state of Alaska but now lives in Salem with her husband, Nolan. She taught Math and Science to middle schoolers for 8 years in the Santiam School District and recently decided she wanted to switch careers. She has now joined the world of financial planning and investing, and we’re glad she did!

She’s been studying to pass her Series 65 exam to become an Investment Advisor Representative and will eventually be helping me as a Junior Advisor within our firm. For now, you’ll be hearing her answering the phone and helping Jeremiah with the admin and operations of the business.

As for myself (Tim) and my wife, we continue to have our hands full with extracurricular activities. Between coaching wrestling, basketball, church, friends, and a toddler, we’re just trying to keep up. Fortunately, the toddler (Charlie) is keeping us entertained. His favorite animal is a cow and he loves to say, “mooooo” about fifty times a day.

The twentieth year of this business has been fun for us and profitable for clients. 

Here’s to twenty more just like it! 

Thanks for reading,

Tim Porter, CFP®