Year End Review - Dead Reckoning Results

 

I’m wishing all my clients and friends a Happy and Prosperous New Year 2025.

With just one day left in 2024, The stock market looks like it will end this year with another double-digit gain; up about 25% on the S&P 500 Index and up 13% or so on the Dow Jones Industrial average. Looking at the major Sectors of the stock market that I normally report on for a good representation of performance, here is the tally through Dec. 27^th.

The Sectors out-performing the S&P 500 Index: Telecom Services, +35%, Technology, +32%, Financial stocks, +31%, Consumer Discretionary, +27%. Sectors showing gains but under-performing the S&P 500: Utilities, +23%, Industrial Stocks, +18%, Consumer Staples, +14%, Energy and Real Estate, +5% each. The bottom dwellers are Health Care, +4%, and Materials, +1.3%. Tossing in our two commodity-based investments of Gold and Silver, they logged in at +26% and +21% respectively.

The other two classes of assets that are most often used in portfolio construction, Bonds and Cash – certainly under-performed stocks. Bonds are barely were break-even in the 2021-2022 period; a slight gain in '23 and about even this year. We advocated to shun Corporate and Government bonds the past two years in favor of short term Treasury bills – maturing in one year or less -  as they are very stable in price and yields were between 4.5% to 5.6% the past two years. That was essentially risk-free interest paid by the U.S. Treasury! Three-month T-bills today are paying 4.25%, Six months at 4.17%.;  (rate chart below) 

I use a portfolio management system that was formulated by my father Larry back in 2018. He labeled it the Dead-Reckoning (DR) portfolio system. His business partner used Dead Reckoning in his Navy duties way back when to calculate future positions and movement of ships at sea. I try to anticipate movements in stocks based on the past price and technical data.

Each month I use this to select investments, type and quantity – and then allocate money to stocks, bonds, precious metals, and Cash. The general premise of DR is that strong sectors tend to continue to move up in price over time; they don’t wiggle around month to month. Once a trend develops, it often moves in that direction for awhile.

Also, when investments move to new highs; think Apple or the price of Gold, there’s a ‘pile on’ effect for those who don’t own it. Then there are no owners at a loss, so there is little reason to sell. Example: Once Gold prices moved above their prior high near $2,050 after the October 2023 Hamas Invasion of Israel, it rallied $700/ounce to new highs last month of $2,775.

Does this always work? Of course not. You can get tricked when investments or sectors move rapidly. Energy and Technology did this to me in the recent past. We’re spread out across 7-8 areas, so no one area will hurt the performance too much. Generally, the portfolio owns 2-3 Market Sectors (of 10) using low expense exchange-traded funds, always a 10% or more holding in Gold, the balance in short term cash or T-bills or money funds earning 4% plus.

I select new buys and sells that get replaced every month; but often hold the same ones for multiple months until they fall off the ranking system.

Here's the record: 1/1/2018 – 11/30/2024

Dead Reckoning Portfolio Management
(Compound Annual Growth Rate):            +7.71%
$100,000 grows to $167,185

S&P 500 Index
$100,000 grows to $221,693                    +12.20%

My DR system under-performed the overall market. Is that relatively good?

You could have just sat in the S&P 500 index almost 7 years and made more money; all stocks, no bonds, no cash or Gold. BUT…you lived through the 2020 COVID bear market, when the S&P 500 fell 20% in 3 months. Then came the 2022 Bear Market, when the S&P lost 19.2% in value that year. Could you have navigated those down-turns, or had the gumption to hold on? That’s two tough calls to make; when to sell and then when to buy. I’ve seen some very poor decision-making in Bear Markets that take years to recover from.

For the DR portfolio, it FELL 7% during the worst COVID period (1^st quarter, 2020), and it also FELL 7.5% during the 2022 (full year) bear market. We call those stats draw-down, or the maximum loss of value from point A to point B. The 2024 performance thus far is noted in the footnote below.

Sure, a lot more goes into portfolio construction and management than just percentages up and down. Your age, your risk tollerance, tax strategy - if it's not retirement account money. I would be fairly accurate to say that all investors would be better served by a diversified portfolio as their main holding, filling in the rest of the space with other investments in real estate, Crypto, annuities, cash value life insurance to name a few.

I hope you found this helpful, and share with your friends please.

Reach out if you have any questions or comments.
And again, be safe out there, wishing you a prosperous 2025!

~Barry

 

2024 Performance thru 11/30/24. (DR)                  +17 %
2024 Performance thru 11/30/24. SP500                +28 %

* all performance stats noted do not include dividends or interest payments; the
dividends/interest of the DR portfolio system and the S&P 500 would be fairly comparable across all portfolio construction time periods.

  

 

Roaring Stock and Gold Markets; What's Ahead?

With just one day remaining in the 3^rd quarter of this year, the financial markets are performing quite well. Stocks and Gold are near new all-time highs, while Bond prices are getting a jolt from the Federal Reserve’s first cut in interest rates since 2020.

Let’s recap the month, quarter and year-to-date.

September’s are normally weak in stock market history, yet this month stock prices are up 1-2 percent. Treasury Notes and Bonds are ahead 1% to 1.4%, and precious metals are ‘on fire’ with Gold and Silver shooting up 6% and 9% respectively during September.

But one month does not fully tell the stellar performance this year, which is a better comparison over the nine months.

The Summers of 2022 and 2023 saw stock market declines leading into those Octobers; falls of 15% - 18%, before the big rallies in the fourth quarter each year. You had to stay invested or be really nimble to bag those gains.

This year saw a 9-10% short decline ending in early August, but essentially stocks gained in the three quarterly periods. So did Gold, to a larger extent. Here is a table of where we stand as of today.

I’ve included the S&P 500 Index (SPY) and the Nasdaq Composite Index (ONEQ) as benchmarks to show what out-performed: namely Gold, Silver, Utility and Communication stocks. Technology stocks round out the short list of the best performing sectors to own this year.

What lagged year-to-date were energy stocks, as oil prices peaked in early April. Still, a positive +6% gain for the sector. Health Care, +12%; Consumer Discretionary, +13%, Industrial’s +18%, and Financial (bank) stocks, up +20%. As you can see, even the lagging sectors gave you nice gains so far this year.

With this market being driven to a large extent by the prospect of a soft landing for the US economy – and now the first interest rate cut – this market may have more room to run higher. But before you go all-in with your lunch money, consider that the stock market (S&P 500), after a dismal 2022 - losing about 20% - is ahead a whopping +50% since New Year’s 2023. Tech stocks are +85%, Financials, +33%, Gold +44%. That’s a lot of moolah in just the past 21 months.

The historical +10% a year average gain for stocks is accurate for longer stretches, but shorten that up and the ups and downs can be dramatic year to year, even decade to decade.

Looking out over 10-year periods since 1926, stocks have not gained anything in 4 periods since the Great Depression, 95 years ago! Two of those were in the 1930's and two were this century. The 2000-2009 stretch is the most recent shown here*.

Compound Average Growth Rate (CAGR), interest and dividends included: 2000-2009

Stocks, S&P 500 Index:  -0.95%
Bonds: Corporate, Gov't. +6% to +7%
Gold, +14%
T-bills, cash: +2.8%

These numbers should jump off the page at you. Inflation averaged 2.6% during that time, so only Gold and Bonds kept you ahead of inflation. We'll call Treasury bills at +2.8% a wash. The nasty 2000-2002 bear market was followed by the Great Recession of 2008 pummelling stocks those years!

Gold prices nearly quadrupled in 10 years; $290 to $1,088 per ounce. Corporate and Government Bonds did the heavy lifting also, rising double digits in 3 of the 10 years.

I looked at the five-year rolling decade periods also and found that 12 periods were negative (out of 95). So that's a 1 in 8 chance of not making money in stocks in a 5 year period. If you are nearing retirement, say in 5-10 years, take heed of this information, and have an action plan.

Advice: Stay diversified to avoid any one investment class causing you big portfolio losses. Use Sell-Stops to protect your gains. The election / political results could affect the market’s direction in November and December.

 I'll post again after the election, and include my performance over the past 7 years using a diversified model-portfolio strategy. Contact me should you have questions or comments. I'm here to help.

Be safe out there!

~Barry

   * while still positive 10-year results, the 2001-2010 and 2002-2011 periods experienced sub-par stock returns of +1.4% and +2.9% respectfully. It was not until 2003-2012 until the rolling 10-year returns were positive and above +7%, and outpaced inflation every 10-year period thereafter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter Markets Recap

The powerful rally in stock prices in the first three months abated quite a bit in the second quarter, but generally added to the year-to-date tally. The Dow topped 40,000 last week, and then added 200 points today to reach another all-time high. 

But looking under the hood, you could see some challenges developing.

Stock prices rose via the S&P 500 Index +4.5% in the three months, and now are ahead +14% year to date. The Nasdaq stock index (about 3,000 stocks) ran ahead +9% quarterly, and up +18% in 2024. Here’s the issue: once you move away from the big stock indexes noted above, performance decreases by comparison.

Look at the stock market’s 11 sectors. Just two of them, Technology, +19% and Telecom Services, +17% beat the S&P 500 Index in the second quarter! The other 9 lagged; Energy was +10%, Utilities +9%, Financials and Consumer Staples +8% each, Industrial and Health Care stocks, +7% each, Consumer Discretionary and Materials, +2% each, and Real Estate stocks, down –4.7%.

The large tech and telecom stocks: think Amazon, Nvidea, Google, Apple, Microsoft, Facebook (Meta) have dominated the stock market’s rise this year. Conversely, a full 4 in 10 stocks in the S&P 500 index are DOWN in price for this year through June 30^th!

At some point this will change. Either the big stocks will retreat, or the other market participants will rise and catch up, or both.

Bond prices fell during the second quarter as interest rates traded in a narrow range. The 10-year U.S. Treasury Note bopped up and down in the 3.9% to 4.7% range. The late April high of 4.7% did not last long and April was the only month this year where stock prices fell.

Still, 10-year Treasury bonds lost about 1.2% in the quarter, and is down 3% year-to-date. Shorter maturing bonds were down less. We continue to favor short term U.S. Treasury Bills that mature in 3-6 months. They pay 5.3% annual interest now; the same rate as when 2023 ended. Treasury bills pose no interest rate or price risk as they mature at 100 cents on the dollar, so you always have a positive interest gain.

Gold prices perked up in the last 3 months, adding 4.5% to the +7.5% gain in the January-March stretch. So Gold is right up there with many stock indexes  performance-wide so far this year. Wars, inflation, political uncertainty all favor hard assets like Gold, silver and other commodities.

Gold continued higher even as inflation has abated quite a bit in the latest (June data) report. We recommend at least a 10% ownership in Gold bullion in most all circumstances, and have been since 2011 when Gold was in the $1,500 range. Gold trades near $2,420 today.

It is easy to get too comfortable with stock prices at record highs and your investing assets continuing to grow. There is though mounting evidence of major cracks in our economy; accelerating in the last few months.

Of note: the U.S. personal savings rate has fallen from 5.3% to 3.9% in the last year; Credit card debit balances are now $1.1 Trillion, a near record high; total consumer debt is $17.7 Trillion, a new high and up a whopping 30% since early 2020 when the pandemic started. Our government can keep printing money to pay down old debt; American's have no such option.

Meanwhile, home prices are up 7.2% nationally the past year, if the average American family can even afford to buy one with the current near 7% mortgage rates.

These numbers are not heading in the right direction, folks. Lastly, reported July 9^th, business bankruptcies are up 34% for the first half year vs. the like period of 2023.

So what’s the point of this dichotomy of Wall Street vs. Main Street? It’s to show you that Wall Street’s operations are driven by different catalysts than you and I operate under. Bond Yields, interest rates, computerized trading systems, fear, greed to name a few. Don’t mistake higher stock prices with a great overall economy; they often do not match up.

At some point, the reduced demand for goods and services will affect company profits and thus stock prices negatively, but for now, it appears that the debt and borrowing by individuals and the Central Banks / Federal Reserve are masking these problems. An interest rate cut by the Fed may bring the inflaton / growth pendulum back in a better balance, avoiding a recession. We'll see.

So if you have investments in stocks, bonds and commodities, you are no doubt offsetting some of the risks of your own economy, and your pocketbook that I have mentioned above.

One example, if you owned Gold since the start of 2021, it’s up $512 an ounce, or +25%. Consumer prices are up +20% over the same time-frame. Get my point?

There appears to be some sector rotation starting in the stock market. Technology and Telecom stocks have pulled back a bit, and the laggards like Real Estate and Financial (bank) stocks have sprouted higher.

Maybe a sea change is in the making?

Stay safe out there!

~Barry