Posted: 8-9-24 | Innovia Wealth
What happened the past two weeks and what should you be doing now?
The stock market was quite volatile the past two weeks, with a drop of almost 10% in the S&P 500 through August 5th,followed by a partial recovery the past four days. Meanwhile, Japan’s Nikkei Stock Average fell 12.4% in one day, the worst single day percentage drop since 1987. What caused the volatility?
- Concerns the Fed waited too long to cut interest rates.
- Signs of slowing in the US economy (e.g., recent labor and unemployment reports).
- Ongoing geopolitical uncertainty around Israel and Ukraine.
- Uncertainty in the US election cycle.
- Changes in interest rates and currency exchange rates relative to the Japanese Yen, which triggered margin calls for some speculative investors.
Whatever the specific reasons, it is important to remember that market declines are normal. A study by Fidelity showed that a typical year has three declines of 5% and one decline of over 10%. This year has been unusual in that we did not see much negative volatility until the past two weeks. Even with the recent market declines, the S&P 500 is still up over 12% year-to-date.
We see several positives when looking at the investing landscape today. Though unemployment has moved up, it is still low by historical standards. Economic growth remains strong, with GDP growing 2.8% in the most recent quarter. Inflation has continued to moderate and corporate profitability is at high levels. Market corrections can be healthy, removing some of the froth from the markets and setting the foundation for the next bull run. Our outlook of a positive market environment for 2024, with periods of volatility leading up to the election, remains intact.
What should you do from here? First and foremost, ignore the short-term noise. Panic sells, and television networks, websites, and newspapers are in the business of selling advertising. The Wall Street Journal website said earlier this week (in very large font) that the “Dow Sinks 800 Points.” That headline is a bit more exciting than “Dow Declines By A Normal Amount That Is Well Within Historical Norms.”
It is important to remember your plan revolves around meeting your goals, not timing the market. Our clients are generally invested in well-diversified portfolios. Bond rates have started to fall in anticipation of expected Fed rate cuts in September, which means bond funds are providing positive returns and buffering against stock market volatility. Your risk absorbers worked as expected. Though we are closely monitoring the markets on your behalf, know that we were sure to do our job ahead of time, building a portfolio for you that was suited to your needs and diversified to provide the long-term growth to support your financial plan. Unless goals have changed, we do not currently recommend any significant changes to client portfolios.
Enjoy the beautiful summer weather and ignore the short-term ups and downs of the markets!
What is a Donor Advised Fund (DAF) and why should I use one?
A donor-advised fund (DAF) is a giving account established at a public charity that allows you to make charitable contributions, receive an immediate tax deduction, and then recommend grants to charitable organizations over time.
How It Works:
- Contribute: You donate assets (cash, securities, or other property) to the DAF, which is managed by a public charity or a financial institution.
- Tax Benefits: You receive an immediate tax deduction for the donation, subject to IRS rules and limitations. Also, if you donate long-term appreciated assets, you do not have to pay the capital gains tax.
- Invest: The assets in the DAF can be invested tax free and potentially grow over time.
- Recommend Grants: You can recommend grants to qualified charities from your fund at any time. The grants can be made in lump sums or periodically over time. The fund’s administrators handle the disbursement and ensure compliance with regulations.
Why You Might Use One:
- Tax Efficiency: You get an immediate tax deduction when you make the donation, even if you decide to distribute the funds to charities later. This can be useful for managing taxable income and charitable giving.
- Simplified Giving: A DAF simplifies the process of giving to multiple charities by consolidating your donations in one place. It also reduces paperwork and record-keeping.
- Flexible Timing: You can contribute to the DAF now and decide on the charitable distributions later, allowing you to plan your giving strategically.
- Investment Growth: The funds can be invested and grow over time, potentially increasing the amount available for charitable contributions.
- Legacy Giving: You can set up a DAF to support causes important to you in perpetuity, even involving family members in decision-making.
A donor-advised fund is a powerful tool for managing your charitable giving in a tax-efficient and organized way.
Private Markets Pulse: Are Private Companies the New Small Cap?
Small-cap stocks, particularly those in the Russell 2000 index, have increasingly become a collection of unprofitable companies. As of March 2024, 41% of companies in this index are reporting negative earnings. This trend is evident from the chart below, which shows a significant rise in the percentage of unprofitable companies over the past two decades. This persistent lack of profitability among publicly traded small-cap stocks can be attributed to various factors, including limited resources, high operational costs, and intense competition, which often impede their ability to generate consistent earnings.
Source: Bloomberg, Apollo Chief Economist
In contrast, privately owned companies are increasingly turning to private markets for financing rather than going public. This shift is driven by the advantages that private funding offers, such as more flexible terms, less regulatory scrutiny, and the ability to focus on long-term growth without the pressure of quarterly earnings reports. Private equity firms have been particularly active, providing substantial capital to high-potential companies that prefer to avoid the volatility and disclosure requirements of public markets. As a result, many profitable businesses remain private longer, contributing to the growing disparity between the performance and financial health of public small-cap stocks and their private counterparts. This is another example of why we are proponents of investing in private markets.
Thank you, as always, for the opportunity to help you achieve your goals!