President’s Day-Monday, February 19^th

The US financial markets will be closed on February 19^th for President’s Day, and our office will be closed as well. We will be back as usual on Tuesday the 20^th.

PLEASE NOTE-2023 Tax Reporting Forms/Dates

All Forms 1099-R (Retirement Accounts Only) were mailed (paper) or available online (eDelivery) on January 31, 2024. Additionally, all required minimum distribution (RMD) account owner notifications were mailed and made available online by January 31, 2024.

All non-retirement account tax forms will be mailed and available online by February 15, 2024. Non-retirement tax forms being mailed include Forms 1099-B, 1099-DIV, 1099-INT, 1099-MISC, and 1099-OID (as applicable).

As always, we can provide your tax preparer a “CSV” (Excel) file that they can download the 2023 tax data into their software.  Just let us know with an email as to who and when you want us to provide this for you.

Reallocated Dividend Payments

If a mutual fund, exchange-traded fund (ETF), or real estate investment trust (REIT)was held in a portfolio, there is a high probability a portion of the dividend payments made throughout the year will be reallocated for tax reporting purposes. As a result, there is a good chance the initial 1099 information may not match the fourth-quarter statement. Due to late reallocation notices, some account owners will receive amended tax forms.

For mutual funds and ETFs, AXOS Advisor Services will begin receiving reallocation information in early January. In most cases, the new information is processed in time for the original tax form mailing. Note: If the information is received after the tax forms process begins, an amended tax form will be sent.

For REITs and mutual funds that hold REITs, the reallocation information is typically not received by Axos Advisor Services in time for the original tax form mailing due to the complex accounting necessary for REITs. Clients holding REITs should look for an amended tax form sometime in March.

The 2023 Tax Filing Deadline is April 15, 2024. Taxpayers have until April 15, 2024, to file their 2023 tax returns, pay any tax due, or to file a filing extension request.

Investment Strategies for a New Era

• Timing significantly affects investment returns, with recent years highlighting AI’s transformative impact on industries and investment opportunities.
• The investment landscape faces challenges due to excessive government regulation and intervention, raising concerns about the sustainability of current market valuations.
• Traditional investment strategies, like the 60/40 equity-bond allocation, are being reconsidered in light of the highest interest rates seen since 2006.
• The Federal Reserve’s potential interest rate cuts signal a complex economic future, with historical patterns suggesting a shift in rate management and inflation control.
• Conservative portfolio management strategies are being implemented to navigate the current unpredictable market conditions, emphasizing adaptability and caution in investment decisions.

Just recently, we discussed the importance of timing for investment returns. We discussed how returns can be dramatically skewed by specific periods, leading investors to believe high returns are “normal.” But on the contrary, we continue to see concern both near term as well as potentially over the next decade. That’s not to say we’re pessimistic. We believe there is plenty to be positive about; in particular, we’ve discussed the immense disruption we see coming from AI. We see it as an era that history will describe as pivotal in the trajectory of humanity. The progress we’ve seen in the last two years is unlike any advancement in history up until now.

As a reference, Midjourney, a generative AI model company that started less than two years ago, recently released its sixth version. Below you can see an example of their first version relative to their most recent. We simply asked both for a “photo of a financial advisor preparing for an entirely new era.” It’s gone from elementary squiggles to perfection in such a short time frame. Digital content will continue to explode, leaving most of what we see as content generated by AI. It’s become nearly impossible already to tell a real photo apart from an AI-generated image. The same thing will soon be said for videos. We will witness some of the most explosive technologies in the next decade, unlike anything seen before.

When looking specifically at the markets, today, we find ourselves in an investment world strained by excessive government regulation as well as unprecedented intervention. In the past, crisis marked generational opportunity for value-based investors. Warren Buffett has always been quoted, “be greedy when others are fearful.” But with the last two crises, we’ve seen escalating government intervention. Howard Marks, a distressed debt value investor, wrote a memo after the actions taken by the government in 2020, and you could sense his frustration that they’ve taken away the role of a distressed value investor. However, it worked in propping up asset prices. The question becomes, “at what cost?” Since the financial crisis, we’ve witnessed market valuations soar to new levels, not experienced since the dot com bubble. These valuations have taken time to build, expanding from lows in 2010 to now all-time highs. But it leaves us in a difficult market to navigate on value alone, moving forward. Couple that with an alarming number of economic indicators that are blaring caution, the investment environment has become increasingly difficult for fiduciaries.

Since the 1980s, most portfolio managers referred to the 60/40 as the ideal allocation for a moderate investor, that is 60% equities/stocks and 40% fixed income or bonds. Bonds have witnessed a “bull” run lasting for decades. Now, we are at a crucial turning point for rates that is too undeniable to ignore. Interest rates have now hit their highest levels since 2006. It would seem to describe the era we’re in with the same indications during the 1980s to 2020 could be misguided.

To help illustrate, let’s imagine different scenarios for the economy over the next ten years. Today, we sit at a point that the market adamantly believes the Fed will cut interest rates this year. Previously, it was anticipated for March. After the most recent Fed meeting, it’s now expected to cut in May or later. So, let’s assume the Fed does cut, then what? Historically, rate cuts lead to further cuts in recent decades. In the past era, the Fed was able to have a significant cushion to continue lowering rates as needed. This is no longer the case.

Eras, like the 1960s and 1970s, the Fed was significantly more erratic, having to sharply cut then significantly implement sharp rate hikes as inflation continued to gyrate. This used to be the norm. It’s only during this recent era that the Fed has been much smoother and more choreographed. If you were an investment manager in the 1980s, you would have been severely misinformed looking at the then recent historical context, which is why many investors at that time refused to partake in one of the best bond-buying opportunities. It’s easy now for many to remember when an investor could purchase a long -term municipal bond with a 13% tax free yieId but didn’t want to lock in a long-term rate because they felt inflation would never drop below 10%! That specific era was defined by a peak in rates. This current era could be marked by a potential bottom in rates, which could have occurred in 2020.

Imagine, what if the US is met with an economic crisis? The Fed would surely drop rates back to zero quickly, and we’d be back in the same predicament of having to rip rates higher again if inflation jumps higher, which could lead to significant rate volatility and increased difficulty navigating. Since the early 1980s, the US has only witnessed four official recessions. Three of those are described as generational events: 2000, 2008, and 2020. Events like these were much more commonplace prior to the 1980s. However, the economy was dealing with high inflation and high-interest rates. Could we be embarking on a similar era?

In prior cycles, two negative GDP(Gross Domestic Production) quarters back-to-back marked a recession. This occurred in 2022, but it was not declared a recession, with which we agreed. At that time, we were optimistic due to lower valuations, but we changed our tune in March when banks began failing, which we may still see more in the months to come. Throw in it being an election year, and we’re bound to see fireworks. Not to mention, we still see the Fed and government as stimulative. For example, the monetary base continues to expand, which doesn’t make much sense when the actions recently taken are all supposed to be destructive to the monetary base. The Fed claims to be performing “anti-QE,”(Quantitative Easing) yet the US monetary supply continues to expand as if they’re performing QE operations. It doesn’t make much sense.

Another good example to help show the uniqueness of this era, Meta, formerly Facebook, released earnings Friday. The stock gained over $200 billion in value in a single day, the equivalent to four 3M’s market capitalization. It’s mesmerizing to see market values change at such a large scale. It is another point that leaves us believing the markets may be heading into an entirely different era with little historical context.

With so many perplexing and conflicting data points, how do we plan to manage portfolios and navigate the unpredictable future that we believe lies ahead? In a time where nothing makes much sense in terms of historical context, what can investors lean on? We don’t pretend to know the future, and for that reason, we have been implementing systems since last fall for client portfolios to help steer us in uncertainty. If you talk to industry professionals who have participated in the markets for the last forty years, you’ll hear them tell you that this is the most unusual environment they’ve seen. Is this because we are in a new era where historical context no longer applies? Maybe.

“In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”

– Eric Hoffer

We intend to continue to hold a conservative stance for all portfolios of all risk, and we will continue that stance until better investments lie ahead. While we initially began implementing a system to aid portfolios back in late fall, we believe it could dramatically help bring order to a perplexing market. While we have discussed this with most clients already, we will continue walking through the specific details on how this impacts your personal portfolios. We are excited for what’s to come, equipped with a system to help guide portfolio management. As always, we will keep you posted.

Last year was a very frustrating year for many, when traditional indicators flashed warning signs most of the year, but the stock market indices forged higher, led by a handful of stocks. Uncertainty often leads to opportunities, and we hope to take advantage of those changes as we move into 2024. If you have not yet scheduled your review for this quarter, do so now as there are several changes we can discuss and our outlook for this year.

We appreciate the continued privilege to be of service to each of you and look forward to continued service in the years ahead!

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

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