March Newsletter to Clients

Enjoy this month’s edition that features a segment on how we invest in changing economic conditions, a reminder that we own what you own, and a review of the market.

Mutual Funds. A representative of an investment management firm called the office recently and his first question was, “What moves are you planning for the next quarter and, long -term, the quarter after that?” He was politely, but firmly, informed that we invest our clients for their own, long-term goals, not for the next quarter.

Now, that doesn’t mean we don’t make changes to take advantage of the current environment. While we certainly don’t try and time the direction of the market because that’s impossible, certain indicators such as rising interest rates can help inform our investment choices. For instance, early during 2022 we made sure portfolios, when appropriate, included shorter-duration bond mutual funds. As the bonds held by those funds mature sooner, the fund can then purchase new bonds paying higher interest rates faster. For instance, the Lord Abbett Short Duration Income Fund (LLDYX) now has a dividend yield of 4.16% and performed better last year than the Bloomberg Barclays Aggregate Bond Index – a common measurement of bond performance in the U.S.

Similarly, rising interest rates often harm high-growth companies by increasing the borrowing costs they use to fuel their growth and reducing the value of their future earnings. So, companies with solid current earnings paying consistent dividends often fare well in rising interest rate environments. As a result, when appropriate for your individual circumstances, we’ve made sure most of you have access to mutual funds that invest in those types of companies. Specifically, Madison Dividend Income Fund (BHBFX) is a fund that fits that bill and it performed much better than the S&P 500 Index of large, U.S. companies last year.

We Own What You Own. Warren Buffett’s most recent letter to shareholders reminded them that he has most of his wealth in Berkshire Hathaway stock and his shareholders “trust him to treat their money as he does his own.” At Moneywatch Advisors, all of us who work here do exactly the same as Warren. Our investments are the same as yours. We use the same mutual funds we recommend for you and no others. If they’re good for you, they’re good for us too.

Market Performance so far in 2023 has been a tale of two entirely different months. The stock market treated January like a greyhound sprinting for that elusive, mechanical rabbit. February, on the other hand, saw the Dow Jones drop 4.2% and the S&P 500 drop 2.6%. A hot economy and persistent inflation were the culprits for February’s swoon.

Investors during December and January were probably unreasonably optimistic that the Federal Reserve had managed to cool the economy and inflation so that further interest rate hikes would be modest and, maybe, even decrease some during the year. Those hopes were largely dashed when inflation numbers arrived in mid-February. As a result, stocks and bonds reacted much as they did for most of 2022 by declining in value.

Compounding this uncertainty is the fact that U.S. stocks are still valued fairly expensively relative to their earnings. The S&P 500 as a whole trades at about 17.7 times expected earnings for the next 12 months. That’s above the 10-year average of 17.2. And that 10-year period includes a couple of years where stocks were trading well over that average.

Thank you for your continuing confidence.