The U.S. stock market is overbought in the short-term and a near-term pullback can never be ruled out, especially in mega-cap tech land.  Regarding the Fed, the late December 2023 pivot has helped, but this rally is about much more than the Fed (we suspect productivity trends are a big part of this rally – see the main section).

Enthusiasm for AI is another key component of the rally, breadth is improving, animal spirits are back, and credit spreads are down pushing up the issuance of debt which is accommodating economic activity.  There is overvaluation and exuberance in a handful of mega-cap tech names, but there is not broad market frothiness. 

Earnings forecasts look favorable.  After dismal 2% growth in 2023, investors are expecting 11% earnings growth in 2024 and 13% in 2025.  We could go on but we are in the sweet spot of the bull market, in our view.

Our readers know we are not fans of Bitcoin and the entire crypto space. However, we follow the crypto markets.  It is hard not to given the enormous coverage from the media.

The crypto rally in the last several weeks has been even more impressive than the rally we have seen in stocks.  Both Bitcoin and Ethereum are up over 60% since their January lows.  Bitcoin is trading at an all-time high.  The launch of spot ETFs for Bitcoin has created enormous demand which has helped the price to spike higher.  Just because there is heavy demand for an asset doesn’t mean there is value there.  We compare Bitcoin to the Dutch tulip bulb market bubble of the mid-1600s when speculation drove the value of tulip bulbs to extremes.  Speculators entered the market flipping tulip bulbs before the market spectacularly crashed.  The lesson to be learned is the power of irrational exuberance.  Yes, we see comparisons between tulip bulbs and Bitcoin and will continue to avoid owning any crypto assets. 

PRODUCTIVITY GAINS ARE HELPING TO PUSH STOCKS HIGHER

One of the large disconnects in the stock market since the start of the year has been the market’s ability to keep rallying even as the number of expected interest rate cuts between now and year-end has been cut in half.  If this is nothing but a rally driven by the Fed, then the divergence between stocks and the number of rate cuts makes no sense.  We think we are in a bull market caused by other factors, one of them being productivity gains.

Productivity gains – more output for the same amount of work – allow more growth without inflation.  We have had impressive gains in productivity this past year.  Are long-term gains on the way, too?

Inflation has come down because the economy has been more productive, not because the economy has slowed.  The pandemic damage to supply chains has largely been reversed.  But this is a one-time gain.  Where will long-term gains come from?

In the long-term, many investors hope that new technologies, including AI, will lead to a sustained productivity boom like we saw in the 1990s.  Higher productivity means higher interest rates (due to more economic growth), but that should be offset by higher profits that growth brings.

Of course, investors could be wrong about long-term productivity improvement due to AI.  Its uses might turn out to be more limited than people hope.  Since last year’s productivity gain due to the reversal of pandemic-era supply shocks isn’t repeatable, the market has a lot riding on an AI productivity boom.  We don’t think investors are getting carried away.  It is a plausible reason why stocks have been rallying.

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Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

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Richard Furmanski

Richard Furmanski

CFA

has been a portfolio manager and analyst for over 35 years. He manages conservative, tax-efficient portfolios for both pre-retirees and retirees. His lower risk approach appeals to investors who want less volatility and competitive risk-adjusted returns.

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Frequently Asked Questions

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Do you manage both stock and bond portfolios?

Yes. We build a portfolio of conservative, high-quality stocks and hold them for the long-term. The average holding period is 4 – 5 years. Our focus is on stocks that are suitable for retirement portfolios.

Our high-quality bond portfolios are designed to provide both income and stability of principal. Bonds provide the anchor for balanced accounts (those holding both stocks and bonds).

What is your investment philosophy?
We take great care in purchasing only high-quality stocks and bonds intent on a multi-year holding period. Portfolio turnover and taxable realized gains are modest in comparison to other active managers. We do not time the market but will become more defensive, in terms of stock holdings, when market conditions warrant.
Will the portfolio be managed in accordance with my financial goals?
Yes. Each of our clients has a custom-tailored portfolio. These custom portfolios are designed to meet specific client objectives with a thoughtful approach to specific constraints such as risk tolerance. And as each client’s situation changes, the portfolio does as well. There is no cookie cutter approach.
What kind of expertise do you have and how can that help me in difficult markets?
We have been working with high-net-worth clients like you since 1982. Over that time we have helped them to navigate several bear markets and financial crises (including the stock market crash of 1987). We hold the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations.
Are you sensitive to taxes when managing portfolios?
Yes. Our holding period for an individual stock averages 4 plus years which means our turnover is low and realized gains can be carefully managed. Further, where possible, we tax loss harvest small losses as a way of offsetting gains taken elsewhere in the portfolio.
How have you performed?
Results will differ by client and the level of customization but we have provided competitive investment returns for many years.
How do you charge for your services?
We charge a management or consultant fee based upon the size and level of customization of the account. As the account grows, we benefit together.

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