Weekly (distribution list)

SimilaritiesIn both 1999 and today, the stock market exhibits strong momentum and a herd mentality, particularly among the largest, most valuable companies. This is evidenced by the significant valuation differential between the market capitalization-weighted S&P 500 index and its equally-weighted counterpart. Currently, this differential is as pronounced as it was in 1999, just before a significant technology stock correction. As we delve deeper, it’s crucial to remember that while trees do not grow to the sky, the same holds true for stock valuations. Valuations Adjusted for CyclicalityValuing stocks using long-run averages of earnings, such as those used in the graph…

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From last October’s lows, the total value of stocks in the United States is up another $10 trillion. Sitting near $55 trillion, the U.S. stock market is now within a stone’s throw of record high valuations. At the same time, profits and profit margins for the largest public companies in the S&P 500 index are also at levels not seen before. There are few signs of stress in financial markets, despite much handwringing over the Federal Reserve’s (Fed) next move. If there were real concerns that high interest rates were about to sink the economy, it is highly unlikely that…

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While the market may appear calm, it’s important to recognize the potential risks that could disrupt this tranquility. The combination of inflated valuations and a surge in liquidity is a potential catalyst for inflation and reckless investing. It’s crucial to maintain a state of vigilance as the situation could rapidly deteriorate, a lesson history has taught us. Fire, Meet Fuel By the end of 2022, America’s fortunes had ballooned. At $136 trillion, household net worth was twice what it was a decade earlier. The unemployment rate was at 3.6%, a 53-year low. And economists at the Bureau of Economic Analysis…

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Imagine you have two options for investing your savings: keeping it in a piggy bank at home or investing in a local business. If the business can use your money to earn more than what it would cost you to lend it out (think of this as the interest you’d want if you just kept your money), it’s a sign that investing in the business might be worth considering. The key is the business must not just earn a profit but a sufficient profit to compensate for the cost of the capital invested in the business, both debt (borrowed money)…

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After an extended period of historically low interest rates, income-focused bond investors have finally found relief as interest rates have risen to levels not seen since late 2007 (see Chart A below). Chart A Time to declare victory, right? If only it were that simple. There are external forces that influence the bond market, none more so than the Federal Reserve (Fed). Who knows what the Fed will do and when? Could they start cutting interest rates this year after two years spent increasing them? Chart B below shows the twenty-year history of the Fed Funds Target Rate. Chart B…

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Imagine this: The U.S. economy had a stellar year last year, outperforming Europe with a robust 2.5% growth rate. This is a far better performance than almost anyone imagined. It was better than most economists, pundits, and forecasters thought possible a year ago. Yet, not only did the economy grow far better than expected, but investors got hooked on risk again. Novel AI technologies captured investor imaginations, leading the tech-heavy Nasdaq Composite Index to trade at a near-record 60% premium to the S&P 500 based on enterprise-value to cash flow multiples (Nasdaq now trades at 24.3x versus S&P 500 at…

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Viewpoint 2024

Over the past year, the economy and financial markets have surpassed most forecasters’ expectations. The U.S. economy grew at an annualized rate of 5% in the third quarter of 2023, with falling inflation, stable employment, and a rise in the S&P 500 stock index.

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Qualityland

At Washington Crossing Advisors (WCA), we go to great lengths describing the high quality businesses selected in our Rising Dividend and Victory equity portfolios. We believe in buying quality companies at reasonable prices that have low debt, predictable cash flows, and are highly profitable and reinvesting back into their business. This follows an intuitive, common sense approach to investing, particularly when considering risk-adjusted return in a strategy. That said, quality investing often becomes convoluted and misunderstood by investors – mainly due to antiquated frameworks put into practice decades ago that have unintentionally become foundational to investing and financial planning. In…

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As 2023 comes to a close and investors look back over the past two years, one can’t ignore the paradigm shift in rising interest rates and its far-reaching effects on markets and the economy. After all, investment portfolios, mortgages, savings accounts, and auto loans, to name a few, have been drastically impacted by rising interest rates, which stand at 5.25% today. To put it into perspective, we have not seen a Fed Funds Rate this high, achieved in such a short period, in over 35 years (see Chart A). Against a backdrop of high rates, risk, and recession uncertainty, it…

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Steady dividend growth often follows consistent profitability and shareholder-focused management. A dividend growth perspective looks beyond today’s yield and considers other factors, such as durability, flexibility, and consistency. A track record of dividend increases can be viewed as a tangible signal by a company’s management that they are both willing and able to boost a payment to shareholders. This commitment suggests quality fundamentals today and an expectation of continued improvement.

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Although the economy is faring better than expected this year, we see a mixed bag of signals. Forexample, while popular market-capitalization weighted stock indices are up for the year, the average stock is essentially flat. Moreover, the outlook for corporate profits and capital spending are flattening out, suggesting muted growth in the private sector ahead. Similarly, monetary and fiscal policies have diverged. Monetary policy is restrictive (higher interest rates), while fiscal policy is expansive (rising deficits). Cross currents such as these lead to a neutral read of incoming data, suggesting we keep portfolio risk exposure very close to benchmarks.

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Page through any investment brochure, factsheet, or presentation, and you’ll eventually get to the disclosure language claiming “All investing involves risk.” For fixed income investors, credit spreads over risk-free U.S. treasuries provide a sense of the interest rate, reinvestment, and credit risk they assume when buying corporate bonds. Along the same lines, stock investors must consider inherent risks in the equity markets when facing investing decisions. The Equity Risk Premium (ERP) indicates the price of risk in equities and is a key metric in determining the appeal of owning stocks versus bonds or other assets at any given time. What…

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