Dougherty Dispatch: First 6 Months, 2024 In Review

Perhaps strangely, what we wrote to sum up the first quarter of 2024 can be repeated for the first half of 2024:

1. The economy has kept chugging along nicely.
2. The rising stock market we saw at the end of 2023 generally continues.
3. Inflation rates have leveled off at rates lower than they were a few years ago, but not low enough for the federal reserve to lower interest rates.

In a nutshell, we are in a very nice bull market in which the stock markets have been generally good and interest rates stable, which means that fixed income and bonds prices also have been very stable.

By the Numbers

Below are six-month 2024 valuation changes next to valuation changes for all of 2023. 

Selected key asset groups:

This is the part of the dispatch where we try to lower the expectations of our clients.  Over the previous 100 years, the stock market has averaged growth of about 10% per year, with some years far above that, and others far below.  As you can see from the figures above, we have already well exceeded this average for both 2024 and 2023 for the S&P and tech stocks.   Very nice.  

Bullish clients running too fast?

It happens every bull market, and especially when one sector of the economy is running very hot, as the tech sector is now.  Clients are tempted to request us to get rid of the “dead wood” in the portfolio and to put more into the hot stuff.  For instance, we were recently asked by a client to sell one stock that has not risen this year but has risen almost 80% in the past five years.  It is still a leader in a fast growing industry, but stock purchasers have lately been moving money to tech stocks, so, to the client looking at this year’s movement, it looks like dead wood.  The problem with chasing trends:  Investment trends historically change, even from year to year.  To illustrate, during the last 15 years, the tech stock sector has been one of the top three performing sectors only five of those years.  More surprising:  The utilities sector, that group of boring electric and waste utility companies, has been one of the top three sectors four times, just one less year than the sexy tech sector. 

Our point:  Sectors in the economy rotate in favor based on economic and investor cycles.  When our firm designs a portfolio, each client is different based on their situation, but we attempt to have some degree of balance to recognize shifts in sector rotation. 

Yes, our recommendations for stocks and stock funds are leaning toward sectors that are trending toward long-term leadership in the economy, namely technology, travel, and insurance.  Industries that include banking, fossil energy, and consumer goods are showing long-term trends of lagging.  We are well aware, therefore, that clients’ accounts are leaning already heavily in the tech area.  And there is intermingling of what sector a company is in:  Booking.com is an online travel company, but uses advanced technology at the core of its business.  Google, on the other hand, is a search engine technology company, but one of its primary services is helping people with travel arrangements. 

Of course, our happy bulls want to put even more of their resources in those stocks that have been superstars recently, such as Nvidia and Google.  Our firm resists extreme overweighting in any company because we’ve seen what can happen and how things turn around – for the worse.  Yahoo lead the way for internet search in the 1990s and once turned down an offer from Microsoft to buy it for $44 billion, which was a lot of money then.  It eventually was bought by Verizon years later – for a paltry $4 billion.  Similarly, the leading computer chip maker for years has been Intel, installed in practically every PC computer.  But in the last five years, people are buying fewer PCs and the company’s stock is down 35% over that period.  Will chip maker Nvidia follow a similar path?

Even Tesla, the darling of so many, has seen its sales decline for the second quarter in a row, and its sales for this most recent quarter are 5% less than for the same period last year, despite a price reduction and more favorable financing incentives.  Meanwhile, GM and Toyota sales have increased.  Yes, trends can change. 

Dougherty’s Core Group Recommendations – A Refresher

For those of our clients who have individual stocks in the portfolios we manage, deciding which stocks to recommend is not a haphazard or casual process for us. 

Fortunately or unfortunately, there are thousands of different company stocks.  Even Warren Buffett realizes he can only manage about 40 at a time and that's what he does.  In fact, currently just one company, Apple, comprises about 50% of his entire portfolio.  By having a limited number of companies, Buffett can be very careful about selection and stay on top of what's happening with each.  

Many years ago, our firm adopted the same philosophy. We have developed a core group of about 25 companies that have made the grade for us to be recommended in clients' portfolios.  We know that with (only) 25 companies in our core we will not hit every winner among the thousands, but our aim is to pick a few of the winners and stay very much on top of them.  As we go through time, we may remove a company from our core (3M) and add new ones  (GE recently, believe it or not).  Selection is done through detailed analysis, a review of research reports, ranking prospective companies within our current core, and using my past experience personally working with dozens of Fortune 500 managers when I was a consultant and employee.  It is a very detailed and deliberate process.

Not all companies we select have the same investment objective.  Some companies are selected because of their price stability and good dividend payments (e.g., Duke Energy Corp), and others may have low dividends, but are projected to have strong revenue and profit growth (Palo Alto Networks). 

For new client funds, we like to often go to those core stocks that are currently depressed in price because they have the most opportunity for a rebound.  This is often difficult and counterintuitive for many clients because they – we – all want to go with the company that’s currently at the front of the race.  So, when Teradyne, a small tech company in our core, dropped 46% in 2022, we knew it was still an excellent company, but now it was at a good bargain.  Many clients rejected our recommendation to buy it.  Then, in 2023, the stock rose 24%, and so far for only six months this year, it is up another 44%.  Perhaps unfortunately, as the bull market continues, bargains of quality companies are getting harder to find.  This is the reason Warren Buffett likes recessions: It’s a good time to go shopping!

As a boutique investment firm that directly manages our clients’ accounts with no third party, the buck stops with us, but we are able to buy for our clients a stock they may request that is not part of our recommended core.  We educate our clients about the plusses and minuses we see in the company, but then buy the stock if the client still wishes to.  However, we cannot promise to monitor it in the same way we monitor our core group:  If even half of our clients requested two non-core stocks to be added to their portfolio, that would be about 300 additional stocks to follow.  We would end up doing a mediocre job with all stocks.

Our goal is not to simply have our core in your portfolio.  Our goal is to increase your account as much as possible:  Our firm’s income increases only if your account value increases.  Period.  Our revenue does not increase if you have more bonds or stocks, more funds or ETFs, more cash or CDs.  The opposite is also true:  During periods when the markets go down, our revenue goes down, even if we advise you to hold on during the crunch and wait for the market to come back.   

Presidential Prediction

Now that I have your attention, you know that we do not make predictions, only site statistics.  Here’s one:  Historical statistics say that given the market’s performance in the first half of the year, there is an 83% chance that it will have some more growth for the rest of the year.  This finding may be helped along if the Federal Reserve lowers interest rates.  Also, historically, the markets rise right after a presidential election – no matter who wins.

Wise philosopher Confucius say:

If you want to get rich quickly, the biggest factor is luck. But if you want to get rich eventually, the biggest factor is consistency.

As always, we love to hear our readers’ reactions.

The Dougherty Investment Advisors Team

Past performance does not guarantee future results.

The first quarter of the year maybe remembered by three notable economic headlines:

1. The economy has kept chugging along nicely.
2. The rising stock market that we saw at the end of 2023 generally continues.
3. Inflation rates have leveled off at rates lower than they were a few years ago, but not low enough for the federal reserve to lower interest rates.

Yes, economists now are putting off fears of a recession for 2024 as the stock market has risen 10% in the first quarter of the year, with several high-flying tech stocks leading the way.  As interest rates have stayed higher than expected, this has been a damper on stocks recently, and securities that are sensitive to high interest rates, such as utilities, and bonds continue to lag.  However, they represent good investments for those looking to put new money in places for good income (bonds, utilities, etc.)

Earlier in the year many experts predicted that the federal reserve would lower interest rates as many as five times during 2024. With inflation data remaining stubbornly high, experts are now predicting perhaps just a few reductions in interest rate reductions and perhaps an interest-rate hike. Although inflation has come down from its high, about 9% to a little more than 3%, it still hasn’t reached the Fed’s goal of 2%. And don’t confuse lowering inflation rates with lowering prices: Lower inflation just means that prices aren’t rising as quickly; unfortunately, it does not mean that prices are actually coming down.

So far, the historical tendency that presidential election years are good for markets has held true. Barring some unforeseen crisis or financial bubble, 2024 is likely to continue this trend. Caution: Do not be one of those investors that keeps money on the sidelines because of a prediction you’ve heard on television or the Internet. In the office, one of Seann’s favorite dictums is that “It’s not important to time when to be invested in the market, but rather how much time you have in the market.” Even if there is a dip, dips have historically proven to be temporary. However, missed opportunities from money sitting on the sidelines is difficult to make up.

Similarly, for fear of future market declines, an investor may be tempted to sell securities that have run up gains. This may be a good strategy if the security is now weak, but not if it continues to be a quality investment.  Remember, even good investments take two steps forward, then one back, then repeat.

By the Numbers

Below are three-month 2024 valuation changes next to valuation changes for all of 2023. 

Selected key asset groups: 

On a personal note, John is recovering very nicely from recent shoulder surgery, and is now debating with himself how much to follow his surgeon’s direction about cutting down on his tennis and golf.  He has just completed his physical therapy program and taking things slowly.  It’s just nice to be out of that nuisance sling.  We will keep you posted.

As always, we love to hear our readers’ reactions.

The Dougherty Investment Advisors Team

Past performance does not guarantee future results

Markets Perform Nicely
The Santa Claus rally that started early in November continued into December, allowing
investors to see a very nice rebound from the previous year.
Additional data in December gave investors expectation that inflation and interest rates were
stable and would continue to decline. Indeed, experts predict that the Federal Reserve would finally reverse direction in 2024 and begin to reduce interest rates.

By The Numbers

When we show 2023 valuation changes next to valuation changes the previous year, 2022, we
can easily see how asset values fluctuate and how short-term emotion often carries market
prices. Here are some key asset groups:

Some other interesting corporate stock assets price changes:

Additional observations: You can see by the figures above that investors shifted between 2022
and 2023 from not liking tech stocks to loving them. You may also notice that health and
industrial (Honeywell), as well as utility company stocks, lagged behind tech stocks in 2023, but
led them the previous year. Rather than being disappointed with lagging sectors, we view the
smaller price appreciation of these groups last year as potential bargain areas for new purchases.
However, we shall not lose focus that technology companies will continue to lead the economy.
This is no more evidenced than the huge increase in the stock valuation of Nvidia, a computer
chip maker of artificial intelligent components that are in very high demand.

We continually fine-tune and tweak our core group of stocks and other securities that we
recommend for our clients. For instance, during the final quarter of 2023, we removed Disney
from our core group. As a result, if you have had Disney stock in your account, you probably do
not any longer. Quantitative performance scoring and analysis of this company find that it no
longer qualifies to be part of our clients' portfolios.

A final observation about the obvious performance difference between 2022 and 2023:
Managing these fluctuations is where our firm has to earn its keep. Investing can be emotional
and often short-sighted. Our clients pay us to put emotion aside, and instead contribute cool and
studied analytics based on education, experience and information. It would have been easy to
react to Microsoft's 2022 decline by selling off some or all of it after it sank 29%. We saw some
other money managers do this in their clients' accounts. But analysis has continued to indicate
the long-term strength of the company, so we stayed put and were fortunate to enjoy the 57%
jump in 2023.

2024 Predictions? Never!

We suppose that some historical predictors of trends deserve some credence. In the Dougherty
Dispatch back in July that reviewed the first half of 2023, we quoted a historical finding: "The
S&P 500 stock index has risen an average of 5% in the second half of the year when the index
recorded a positive return in the first half."

In the first half, the S&P rose 15%. In line with historical trends, the market indeed rose in the
second half--another 9%.

Another interesting historical trend: In the last 16 presidential election years, the stock market
has risen. This year, 2024, is an election year.

Let's see what happens.
Our office is in the process of preparing full year client summaries for each of you. If you have
any questions after received, give us a call.

Happy New Year!
The Dougherty Investment Advisor Team

Well not quite. Stocks climbed 6.2% in January – second best January since 1990 – as a result of good inflation and Fed news, but then declined 2.6% in February, and for the year are up about 3.4%. Tech stocks on average are up for the year about 9% through February.

Good Riddance to 2022 !

The number 2022 has three twos in it, but you might think that with what happened last year it had the curse of three sixes. The list is long: High inflation, rising interest rates, continuing difficulties with Covid, disasters with flight cancellations, high energy prices, and stock and bond markets falling are all enough to make us wish we had taken a long nap – or maybe hired an exorcist.