July Newsletter to Clients

Enjoy this month’s edition that features a congratulations to Ramsey Bova, a market recap, and a fund spotlight.

Ramsey Bova has been appointed by Kentucky Governor Andy Beshear to serve on the Kentucky Retirement System Board of Trustees. The 9-member board oversees the Kentucky Employees Retirement System and the State Police Retirement System. By Kentucky law, the Governor’s appointees must have at least 10 years’ experience in either investments or retirement. The appointment is for a 4-year term.

Market Recap:

The first six months of 2022 was the worst start to a year by the large, U.S. stock index S&P 500 in 52 years. The big, popular companies that drove much of the stock market’s growth over the past few years – Apple, Amazon, Microsoft and Google – have driven much of this year’s decline. The S&P 500 is down over 21% year to date, while the index that tracks these and other large, technology related companies is down over 34%.

Interest rate increases have been the driver of much of the stock declines. When interest rates were historically low, investors piled into so-called growth stocks in search of greater returns. Risk-taking was rewarded because the alternatives – such as bonds – yielded such little income. This year, in a turn-around after decades, so-called value stocks have typically outperformed their growth counterparts. Value stocks are companies whose stock prices trade at lower multiples of their net worth. These types of companies often rely less on borrowed money to fuel their growth so are less impacted by rising interest rates.

So, what happens next?

Since 1960, the S&P 500 has had just two first-half losses greater than this year’s 21% drop.

• In the two years where losses exceeded this year’s, stocks rebounded in the second half, rising 15% in the final months of 1962 and 27% in 1970;
• In the seven years where the first-half decline was 10% or more, four of those years saw the market decline further in the second half.

Based on current projected earnings, the stock market is valued fairly based on historical valuations. If the economy dips into a recession, however, then it’s safe to assume that earnings will decline. If that happens, stocks will be valued higher than they’ve been historically relative to earnings. Investors may react by selling, reducing stock prices further.

Mutual Fund Spotlight:

The mutual fund, Madison Divided Income Fund (BHBFX) that many of you, and we, own focuses on value companies. Year to date the fund is down just 10.5% - just half the decline of the S&P 500. The fund owns many long-established companies such as Bristol Myers Squibb, Johnson & Johnson, Travelers Companies, McDonalds, Home Depot, Verizon, etc. Normally at least 80% of the fund’s assets are invested in dividend paying companies and they are chosen for having a current dividend yield that exceeds the S&P 500’s average yield. A key attraction is a company with a history of increasing dividend payments and a business model that supports the possibility of these increases in the future.

The fund’s driving principle is to participate and protect. What they mean by that is they expect investors to participate in market appreciation during bull markets and be protected during bear markets compared with investors in more volatile companies. So far this year, the fund has met its objective.

Thank you for your continuing confidence.