The Advisor, February 2023

What’s New at GPW

Ever wonder what the science is behind a leap year? This Smithsonian Institute article explains the physical impact of excluding a leap year and how we determine when a leap year is.

At Gentry Private Wealth, we are leaping into February with exciting updates. This month’s newsletter contains 2024 economic forecasts and a look at our happy growing pains. We plan to spend our extra 24 hours in February providing the utmost care to our clients’ wealth goals.

Jeff Wetta, RPS and Dustin Jackson, CFP® RICP®
Managing Partners

 

Gentry Podcast: Episode 3

Did you miss our 2024 Market Outlook Event? Join Dustin and Sevasti as they discuss our takes on the 2024 market and economy. Click here to watch now!

 

After a Surprisingly Strong 2023 in Equities, Will the Markets Continue to Rally?

Each new year, we reflect on what happened last year: by the end of 2023, the S&P 500 finished up 26.3%, the tech-heavy Nasdaq finished up 44.6%, the Dow Jones Industrials finished up 16.2%, and the smaller cap Russell 2000 finished up 16.9%. Most market strategists and economists predicted a recession with mounting inflation and a potential for negative equity markets in 2023. Fortunately, this outlook was a bit too pessimistic.

The opposite is now predicted for 2024, with most market strategists and economists anticipating either no recession or, at worst, a very soft landing (i.e. a minor recession with limited market impact). Most outlooks forecast a continuation of the positive market because cash moved back into equities throughout the final quarter of last year.

We too have a positive outlook, but it is important to caution that markets can move differently than consensus expectations. The Federal Reserve has indicated they are likely done with rate increases and that they may begin to cut rates in 2024. There are three projected 25 bps rate cuts anticipated this year to reach a target year-end federal funds rate of 4.5% to 4.75%. Further cuts are planned in 2025, for an ultimate federal funds rate closer to 2.5%. This financial easing would likely be positive for markets and the economy, which is the main reason for the market rally in fourth quarter 2023.

We are monitoring many economic factors, but high on our list are:

  • Inflation – The current 3.1% (or 4.0% excluding food and energy) rate is still much higher than the Fed’s 2.0% target. A pick-up in inflation could dampen rate cut expectations.
  • Corporate profits – Growth in corporate profits will be important as this helped drive markets in 2023.
  • GDP – Economic growth was strong in Q3 2023 at 4.9% but is expected to slow. We anticipate it will still be positive and avoid a recession, although at a lower rate (1.5% to 2.0% range) so as to not reignite inflation.
  • International affairs – World hostilities and how they may affect economic growth and the price of oil, in particular.

Looking Ahead & How to Position

We start the year with a neutral weight in equities and are overweight in alternatives (primarily through our investments in yield notes) relative to traditional fixed income.

Within equities, the majority of our exposure is to the S&P 500, with smaller exposure to growth stocks and dividend stocks (in roughly similar weights). Growth stocks, as noted above, performed well in 2023. We maintain exposure to such stocks because of their strong profit growth and healthy balance sheets. We also maintain our exposure to dividend stocks despite the fact that they underperformed in 2023. Hurt by higher interest rates, sector rotation into growth names, and mid-2023 turmoil in the banking sector, dividend stocks traded down in 2023. However, we have a positive outlook for dividend stocks given the likely peak in rates, and their attractive valuations and yield. On average, our dividend stock portfolio is yielding a bit more than 5%. Historically, dividend stocks have traditionally rebounded after a negative year.

We also have roughly 10% exposure within equities to small cap and international stocks. These sectors didn’t perform as well as the S&P 500 in 2023 but have attractive values from our perspective and could outperform in a slow-landing economic environment.

Additionally, we believe there is real opportunity in private equity investments, both through Carlyle, a private equity manager that we have thoroughly vetted, and with our in-house Venture Growth Fund. Private assets such as these provide investors with an attractive entry point because, in general, they have not performed as well as the mega-cap publicly traded stocks.

Overlying these equity strategies are our structured growth notes with defined outcomes. In 2023, we invested in such notes in both our growth strategy and our dividend strategy. These notes can help at a market crossroads by driving an attractive return within certain risk factors.

On the fixed income side, we are invested in both short-term and intermediate duration assets. Treasury bills and floating rate debt comprise the short-term allocation, while corporate bonds and municipal bonds make up the intermediate-term allocation. We also invest in yield notes within our alternatives allocation to enhance our yield. These notes use broad indexes as their underliers and often mature within a few years.

A private credit strategy might also be used for selected accounts to help drive what we believe is a steady and attractive yield return. These are investments in the debt of real estate companies which are, credit-wise, higher up on the credit totem pole than mortgages. Additionally, we are in the final phases of researching traditional private credit and plan to opportunistically increase our investment in this area over time.

Moving forward, we will continue to actively monitor the potential for prolonged upward movement in equities (at a likely slower pace), while keeping abreast of incoming economic and company data to get ahead of a potential downturn. We are focused on having a broad mix of investment securities anchored by the S&P 500 in our equity holdings and augmented with growth notes and attractively-yielding dividend stocks that have a high confidence of dividend payout. For fixed income, we are taking advantage of historically high short-term rates, along with yield notes and a planned increase in private credit.

The future seems brighter than last year despite some continued uncertainties, and we have confidence in our investment positioning.

Sevasti Balafas, CFA, CPWA®
CEO & Founder
GoalVest Advisory

Sources: Goldman Sachs, Ycharts, JP Morgan Asset Management, Blackstone, Carlyle, Apollo, Invesco, Nuveen

 

We’re Moving

If you’ve been to our office recently, you may have noticed that we added workspaces to accommodate our expanding team. With the happy dilemma of where to fit all these team members, we have been searching for a new home base. This May, we are moving to 8415 E 21st St. N Suite 150 Wichita, KS 67206.

Check back in with future newsletters to see progress updates!