“An investor who has all the answers doesn’t even understand the questions. Success is a process of continually seeking answers to new questions.” – John Templeton
What a difference a month can make in the markets. After a rather robust March for investors, the stock market indexes we follow took a significant turn lower. The poor performance wasn’t just the US markets. Both the MSCI World and MSCI EAFE international indexes posted monthly losses. The lone exception was the Emerging Markets index with a modest gain for April. The two clear winners for the month were Commodities and the US Dollar index, with gains of 0.40% and 1.70% respectively. The Aggregate Bond Index lost 2.50%.
All data as of 05/01/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
John Templeton’s quote at the top of this post beautifully encapsulates the essence of successful investing. He wisely stated, “An investor who has all the answers doesn’t even understand the questions.” This profound insight reminds us that true success lies not in having a ready-made playbook, but rather the ongoing pursuit of knowledge and understanding. The path to prosperity involves continually seeking answers to fresh inquiries—questions that challenge our assumptions, broaden our perspectives, and lead us toward better decisions. Just as an ever-curious mind propels us forward, so does the investor who remains open to learning, adapting, and embracing uncertainty. Success, then, becomes a dynamic process, fueled by curiosity and the courage to explore uncharted territories.
This is exactly what we want to discuss this month – the process. More specifically, our thinking and thought process around the economy, the big trends in society, and how we think of and about the markets when designing investment portfolios.
Let’s dig in …
Thinking on the Economy
If you turn on CNBC for more than a few minutes you can easily get the impression that the workings of the US and global economy is a relatively simple system. At Magellan Financial we take a different approach. Unlike many of the TV pundits, we believe that it is crucial to acknowledge that the economy is a dynamic, complex system influenced by myriad factors – geopolitical events, technological disruptions, demographic shifts, and unforeseen crises, among others.
Because there are so many factors, predicting exact outcomes is impossible. Just because A happens does not mean that B, then C will occur. One great, recent example of this is the effect of interest rates on the economy. In March 2022 the Federal Reserve Bank (The Fed) started to aggressively increase short-term Fed Funds interest rates with an initial rate increase from near zero to a level of 0.25-0.50%. In July 2023 – less than 18 months later – the Fed implemented its final increase, setting that same rate at 5.25-5.50%.
A common talking point during this period was that the rapid increase in rates would increase costs for both businesses and consumers, slowing the economy would result in higher unemployment and lower wages for workers, and ultimately an economic recession. We remember the constant calls by pundits that lasted for months that an economic recession was just around the corner. What happened was the unemployment rate remained near historically low levels, real wages are on the rise, and the economy continues to grow.
We believe what the pundits got wrong was a reliance on the simple thinking that because A (aggressive rate increases by The Fed) happened, B (economic activity would slow, causing higher unemployment and a slowing economy) then C (recession) would ultimately occur. What was missed in this simple analysis, in our opinion, was the unique situation surrounding Covid and the reaction by policymakers as the global economy reopened for business.
We view this as an example of economic dogma at its worst. A more prudent approach to thinking of the economy is to use history as a guide to what is possible. The world we live in today is much different than the world we lived in 10, 20, 30 or 50 years ago and should be treated as such.
Considering Big Trends
In our world, understanding and monitoring economic and market trends is crucial when retirement planning and developing investment portfolios. We feel it opens our minds to a world of possibilities that strict adherence to a theory of how the world works does not allow. Thinking of the big trends we believe gives us an advantage in managing portfolio risk, capitalizing on opportunities, and planning for the long-term.
Risk Tolerance & Risk Management: First and foremost, in any conversation about investment management is a discussion of risk tolerance and risk management. An investor with a high-risk tolerance may be comfortable with more aggressive investments carrying greater market risk, and potentially higher returns. Conversely, an investor with low-risk tolerance would likely prefer a more conservative portfolio focused on capital preservation.
Regardless of your risk tolerance, staying informed about market and economic trends with an open mind, in our opinion, is akin to navigating a ship through changing tides. Economic cycles impact various asset classes differently. Equities tend to flourish in periods of expansion, while fixed-income assets like bonds can provide stability during economic decline. Commodity prices, currency fluctuations, and interest rates also correlate with economic shifts. We believe that navigating these bigger trends through tactical asset allocation allows us to manage risk more effectively than a static allocation.
Capitalize on Opportunities: Economic trends act as signposts pointing toward growth opportunities. As advisors, identifying emerging sectors and industries is crucial. For instance, we see the rise of renewable energy, technology advancements, and healthcare innovations as exciting areas of opportunity. Navigating market shifts—such as the surge in e-commerce during the pandemic—requires strategic allocation of investment resources. By capitalizing on these types of trends we feel we can enhance portfolio performance and deliver value.
Long-Term Planning: It is easy to get caught up in the day-to-day of the markets. In our opinion, what happens on most days is simple noise, not the ideal place to look for long-term planning. Instead, we look toward the economic and technological trends to provide context. This approach allows us to set realistic return expectations, aligning investment strategies with financial goals, leads to a harmonious journey toward wealth accumulation. Moreover, informed decision-making fosters trust and satisfaction among clients. When clients see their portfolios adapting to economic realities, they appreciate the value of professional guidance and expertise.
Final Thoughts
There is no room for dogma when it comes to managing a portfolio, be it a portfolio of individual stocks or an asset allocation of multiple investment categories. Knowing we don’t have all the answers from a pre-conceived playbook, having an open mind, we believe, allows us to manage an investment portfolio more effectively, through the full market and economic cycle. Do we get every decision right? Absolutely not. Nobody does. We do, however, believe that having an open mind to the trends, happening in real-time, with an understanding of the past gives our clients the best chance of success.
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On behalf of Magellan Financial, we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com