Obermeyer Wood News - Summer 2024
Marketpoint: The Usual Suspects
The American economy and financial markets continued to shrug off hawkish monetary policy in an impressive march forward through the first half of the year. Markets started the second quarter of 2024 on shaky footing, with stock indices all down more than 4% in April, before rebounding significantly in May and June. Although major U.S. indices finished the quarter in positive territory for the year, large-cap companies continued to outpace small-cap companies by a significant margin. The catalysts for market movements throughout the quarter were the usual suspects as of late: the Fed, inflation, AI, consumers, and corporate earnings.
Early in the quarter, market expectations for Fed action on cutting interest rates shifted from three rate cuts by year-end to two (although the Fed’s own projections show only one by year-end1), likely at the September and December Federal Open Market Committee (FOMC) meetings. The May Consumer Price Index reported below estimates and markets reacted positively. Shelter inflation, a metric watched closely by the Fed and usually the last shoe to drop among inflation metrics, remained high, up 5.4% year-over-year, accounting for nearly two-thirds of the total core increase.2 The FOMC acknowledged the overall positive news on inflation at its June meeting but reiterated its stance that interest rates might stay higher for longer.
Meanwhile, AI enthusiasm continued to propel stocks that are both directly and indirectly associated with paradigm-shifting technology. As of late June, the S&P 500 technology sector was up nearly 25% for the year, accounting for a large portion of the broader index’s gains. While there is reason for optimism and hype in this sector, the burden remains on the companies to prove that they can convert these prospects into revenue. We anticipate that stocks in this area that are unable to meet the market’s high expectations will be punished. The prospects for increased efficiencies and positive impacts on corporate earnings are promising. Early indications show that some businesses are already expecting significant AI-driven profit improvements in 2024, but not all companies have figured out how to monetize large upfront investments in the technology yet.
AI enthusiasm has pushed valuations higher, but that doesn't mean they are guaranteed to correct lower any time soon. High valuations can remain high for extended periods. The S&P 500 has traded at 20 times forward earnings since mid-January of this year. Prior periods of similar valuation height stayed at those levels for two years, and other factors point to more room for this market to run.3
The Magnificent 7 stocks—the term popularized to describe Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla—have continued their market dominance from last year and are up almost 35% since January, while the remainder of the S&P 500 (ex-Magnificent 7) is up about 5%. However, there are signs that a broadening of the bull market is shaping up for a more inclusive second half of 2024. According to an analysis by J.P. Morgan (see chart), all 11 sectors within the S&P 500 could see earnings grow on a year-over-year basis by the fourth quarter of this year, a feat that has not been achieved since the second quarter of 2021.
The U.S. consumer remains healthy and debt service ratios for households are above their long-term averages. Consumers still have excess savings, wage growth is above its long-term average, and unemployment is significantly below its long-term average. There have been some warning signs that consumers are slowing spending, which is not the least bit surprising considering the Fed’s intentions with tightened monetary policy. In fact, a more subdued yet growing economy is exactly what the Fed would like to see as it still attempts the elusive soft landing.
Looking Ahead: Election Season and Fiscal Policy
As we approach the general election in November, we know emotions will be running high. Partisan politics are certainly not new. However, viewer-monetized 24-hour news cycles, social media algorithms, disinformation potential, and other factors appear to have heightened divisiveness over the last decade. As investors, we look to history to guide us on how to navigate the markets during election years and help guide clients through periods of uncertainty.
The data from previous election years tell us four important things:
1. Volatility increases in the lead-up to election day and levels out after the election.4
2. Markets, on average, have had positive returns in all election years5, and performance in presidential election years has exceeded the market's all-time average annual return since 1926.6
3. Since 1948, there has not been a statistically significant correlation between one-party control of the White House and Congress and market performance.7
4. Economic conditions such as inflation and the labor market play a more significant role in stock market performance than political parties.
The next round of leadership in Washington will have many significant issues to deal with, and two that we are paying close attention to are the debt ceiling (which will likely need to be raised next spring) and tax policy given the 2017 Tax Cuts and Jobs Act expiration at the end of 2025. As it relates to the latter, our team remains focused on the issues most likely to impact our clients (particularly those with potentially taxable estates) and is reaching out proactively to families and individuals most likely to be affected.
Our Approach
We remain cautiously optimistic about the path ahead for the market. The equity market continues to make its preference clear for established companies with industry leadership, significant competitive moats, and large total addressable markets. Growth expectations in the equity market have become concentrated because of this, with one or two companies in each sector driving those sectors to be the “winners.” This could mean that the market’s path is a bumpy one, and occasional corrections should be expected, especially with many valuations above historical averages. But when winners are sold, we expect those proceeds to be redeployed into other sectors versus leaving the equity market entirely, given the potential upside of the broader market. The fixed-income market shows support for a “higher for longer” rate environment, offering attractive yields in short-term treasuries and money market funds.
Our team continues to focus on high-quality companies with strong organic growth prospects and positive industry dynamics. We continuously monitor risk and client exposures, are thoughtful about asset allocation based on each client’s circumstances, and have a firm belief in the power of sticking to long-term and disciplined strategies. It is a privilege to partner with you and your families; thank you for your continued trust.
1) The Federal Reserve “Summary of Economic Projections,” June 12, 2024
2) U.S. Bureau of Labor Statistics, “May Consumer Price Index Summary,” June 12, 2024
3) Evercore ISI, “Raise S&P 500 YE Price Target to 6,000,” June 16, 2024
4) J.P. Morgan, “How volatile are markets during an election year?” April 30, 2024
5) J.P. Morgan, “Stock returns don’t tend to differ much in election years,” March 18, 2024
6) BlackRock, “How the U.S. election may impact your portfolio,” February 16, 2024
7) U.S. Bank, “How Presidential Elections Affect the Stock Market,” June 21, 2024
OBERMEYER IN OMAHA
Berkshire Hathaway Annual Shareholder Meeting
In May, the Obermeyer team once again joined tens of thousands of excited shareholders at Berkshire Hathaway’s annual meeting. While the overall mood remained festive, this year’s “Woodstock for Capitalists” was notable for the absence of Vice Chairman Charlie Munger, who died near the end of 2023 at age 99. From the exhibition hall, where the only book for sale this year was “Poor Charlie’s Almanack,” to the stage where Munger previously held court with CEO and Chairman Warren Buffett, this year’s gathering was a tribute to the pair’s friendship and business partnership, as well as Munger’s remarkable legacy.
Our group landed in Omaha, Nebraska, eager to join the many shareholder and industry events leading up to the main event at the CHI Health Center. The shareholder meeting kicked off bright and early with every seat filled and Berkshire Hathaway’s 30-minute introductory video. This year’s movie was broadcast live for the first time, and a tribute to Munger’s life and legacy. Munger’s one-liners from previous meetings drew laughs from the packed convention center, while footage of Munger through the years highlighted both his wit and wisdom as an investor.
When the lights rose to sustained applause, Munger’s absence was again notable as the chairs next to Buffett were filled by Vice Chairmen Ajit Jain and Greg Abel. Buffett took the spotlight, first by reviewing Berkshire’s solid first-quarter earnings. All three men then spent hours answering questions from the moderator, shareholders, and analysts. One bittersweet moment occurred when, after decades of habit, Buffett took an energy-related question and then handed off to “Charlie” for his answer. Abel deftly stepped in after a collective chuckle. Buffett also took ample opportunities to reassure the audience that Berkshire will be in capable, experienced hands when Abel takes the reins from him.
The Q&A session brimmed with lessons on values investing and values in general. In response to a question regarding when Berkshire will invest its massive cash stockpile, Buffett responded that “I don’t think anyone sitting at this table has any idea how to use it effectively, and therefore we don’t use it.” Berkshire invests only when it makes sense, not in response to external pressure. “We only swing at pitches we like,” Buffett noted.
“If you had one more day with Charlie, what would you do with him?” a young attendee asked Buffett. Buffett advised the boy to ask himself who he’d want to spend the last day of his life with, then find a way to meet them as often as possible.
When a shareholder asked for advice “everyone needs to hear,” Buffett said to “take Charlie’s advice” and start by writing your own obituary. Then get to work on building a life that will get you there.
Buffett, who is 93, ended the meeting by thanking shareholders and reflecting on his own mortality. “I not only hope you come next year, I hope I come next year,” he quipped. We share the sentiment.
View footage from this year’s meeting, interviews, a timeline and much more at CNBC’s Warren Buffett Archive: buffett.cnbc.com/warren-buffett-archive/
Reach out to your advisor to learn more about how Berkshire and values investing align with client portfolios.
RECOMMENDED READING
"In This Economy? How Money & Markets Really Work" by Kyla Scanlon
Kyla Scanlon’s "In This Economy?" is an engaging dive into the state of the modern American economy, presenting readers with all levels of financial literacy with a refreshing blend of humor, insight, and education.
Early chapters set the tone by exploring how collective feelings, or “vibes,” influence economic trends, grounding abstract theories in real-world sentiments. The book then journeys through the workings of banks and the critical role of the U.S. dollar, making these foundational topics both interesting and easy to grasp.
Scanlon’s take on supply and demand, Gross Domestic Product, and the fragility of supply chains, highlighted by the COVID-19 pandemic, is both timely and educational. Her detailed explanations of commodities and inflation provide readers with a solid understanding of these essential economic elements.
In later chapters, Scanlon delves into the labor, stock, and housing markets and touches on contemporary issues like the housing crisis and the infamous GameStop saga. The brief yet informative chapter on cryptocurrency is a notable inclusion, shedding light on its complexities and risks.
Overall, "In This Economy?" is an interesting look at the current state of the economy, blending educational content with timely storytelling. It can be especially helpful for people in their 20s and 30s as it uses historical context to explain complex topics for the layperson while offering enough depth to satisfy more knowledgeable readers. If you are interested in reading “In This Economy?” please contact our team, and we will send you a copy.
FIRM UPDATES
Forbes’ America’s Top Wealth Advisors and Best-In-State Wealth Advisors
Wally Obermeyer, Ali Phillips, and Dana Nightingale – representing our team’s collective efforts – were recently recognized by Forbes and SHOOK Research for their dedication to providing our clients with sound financial guidance and investment management.
Obermeyer was ranked as one of the top 250 wealth advisors in both the United States and the state of Colorado. Phillips and Nightingale were also named among the state’s top advisors. Obermeyer Wood was the only independent advisory firm in Colorado to have three advisors named to this list.
Forbes’ ranking of America’s Top Wealth Advisors and Best-In-State Wealth Advisors, developed by SHOOK Research, is based on an algorithm of qualitative criteria learned through telephone, virtual and in-person due diligence interviews, and quantitative data such as revenue trends and assets under management. The ranking focuses on those who encompass best practices in their approach to working with clients. The factors it weighs include service models, industry experience, and compliance records.
“These recognitions reflect the dedication of everyone at Obermeyer Wood to providing best-in-class service, holistic financial planning and guidance, and sound investment management,” Phillips noted. “We are driven by our desire to serve our clients and their families to the very best of our abilities. We also know that none of this would be possible without our clients’ partnership and support, for which we are grateful.”
Please visit our website to read more about these awards and for important disclosures regarding third-party awards and recognitions.