Dougherty Dispatch: First 6 Months, 2024 In Review

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.