What Have You Done for Me Lately?

On February 26, NVIDIA announced record quarterly revenues with a 78% increase from the previous year. It beat analysts' expectations and issued relatively positive forward guidance, yet its stock still fell by 8.5% the next day.

Similarly, S&P 500 companies reported 18% year-over-year earnings growth for Q4 2024, but the index is down 2% for the year. Since investors' primary concern is future earnings growth, the past quickly becomes irrelevant. As a result, even positive reports can lead to market declines when investors ask, "What have you done for me lately?"

This counterintuitive quirk makes investing frustrating, but the underlying economics make sense. When you buy a stock, you are only entitled to future earnings--last year's earnings went to the seller. So if the prospect for future earnings growth declines, so will the stock's price.

Investors are already wary of high US market valuations (forward 12-mo P/E is 20.7 versus 18.3 10-yr average), so they are looking for any potential weakness in earnings growth. Add tariffs and sweeping federal layoffs to that uneasiness and you get a selloff.

Notably, international developed markets have a much lower valuation (forward 12-mo P/E is 14.3), and the MSCI EAFE index (international developed) is up 11% for the year.

Fortunately, the market can reverse just as quickly. In 2020, the S&P 500 went from down 30% in March to up 16% by year-end. If unemployment remains low and earnings continue to grow, the market can recover and return to positive territory, especially if the White House can find a compromise on tariffs.

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Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@lefleurfinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm

Unexpected Events

At the end of January, DeepSeek unveiled its AI model, a lower-cost Chinese version of ChatGPT that performed comparably to its US counterpart. This unexpected development caused the S&P 500 to drop by 1.5%.

Fortunately, the market corrected within a few days as more came to light about DeepSeek's development process. Investors also realized that more affordable AI is actually a good thing. While short-lived, this incident highlights a recurring theme in the stock market: unexpected events drive economic and market disruptions.

Most often, we associate these unexpected events with negative developments:

• October 2002 (S&P 500 -49%) - Coming out of the 1990s, the world worried potential Y2K fallout while internet companies without profits flew under the radar.

• March 2009 (S&P 500 -57%) - Throughout 2007 and 2008, oil prices and conflict in the Middle East dominated headlines while the housing bubble was believed to be contained.

• March 2020 (S&P 500 -34%) - Going into 2020, there was general concern about global slowdown in economic growth and inflation below the Fed's 2% target while COVID-19 was making its way across the globe.

But the same effect applies to positive developments:

• mRNA Vaccines - These vaccines allowed us to come out of the pandemic and re-start the global economy.

• Artificial Intelligence - When ChatGPT became a household name, the practical use for AI became real, paving the way for NVIDIA and other tech companies to unleash a new wave of earnings potential.

• GLP-1 Medications (Ozempic, Wegovy, Mounjaro) - These drugs created a breakthrough in the ongoing battle against obesity and diabetes.

Investors spend a lot of time and mental bandwidth worrying about inflation, interest rates, tariffs, and every other headline that dominates financial news. In reality, the true market drivers, both positive and negative, won't come where we expect.

So how do you prepare? You proactively create a balanced portfolio with an investment allocation that matches your individual risk tolerance and time horizon. Then you stick to it. You don't reactively chase returns or sell in fear. Instead, you keep time on your side and let markets do the rest.

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Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@lefleurfinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

Inflation FAQ

Inflation has been a hot topic since 2021, but its causes, solutions, and broader implications remain unclear to many. So let's clear up some common misconceptions:

What is inflation?
Inflation is the rate of price increases for goods and services in an economy, primarily measured by the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). While the CPI gets more attention, the PCE is the Federal Reserve's preferred measure, differing mainly in the weight given to various categories.

However, these indices only provide general trends; individual experiences vary based on personal consumption habits. For instance, housing costs significantly impact both indices, but homeowners with low mortgage rates won't feel the effect of this category. On the other hand, if you consume a lot of eggs, you've definitely felt it in your spending.

What causes inflation?
Inflation can stem from several sources: demand-pull (e.g., Millennials buying houses), cost-push (e.g., COVID-19 supply chain disruptions), monetary policy (e.g., Quantitative Easing), and fiscal policy (e.g., stimulus checks and tax cuts). Typically, there is a combination of these factors at play, but primary drivers are a common debate among economists.

If inflation has come down, why are prices still high?
As inflation has moderated recently, people still complain about high prices, mistakenly thinking lower inflation means lower prices. In reality, lower inflation only means the rate of price increases has slowed.

If prices were to decrease overall (i.e. go back to 2019 levels), it would indicate deflation, which is harmful to the economy. Deflation suggests reduced demand and economic stagnation, creating a vicious cycle where expectations of lower future prices further decrease demand and shrink the economy.

Is inflation always bad?
Contrary to popular belief, inflation isn't always bad. Before 2020, the Federal Reserve was more concerned about deflation, with nearly a decade of inflation below the 2% target, leading to prolonged low-interest rates. While low rates benefit borrowers and stimulate economic activity, they also encourage speculative investments and limit future stimulus options through rate cuts.

What is the natural rate of interest?
The natural rate of interest, or r-star (r*), is the rate that neither stimulates nor restricts the economy. The Federal Reserve adjusts the federal funds rate (FFR) above or below this natural rate to control inflation or boost the economy, respectively.

However, the natural rate can't be calculated or observed in real-time, only estimated after the fact. This uncertainty complicates the Federal Reserve's task. If the Fed overestimates the natural rate, it may keep rates too high, stifling economic activity. Conversely, underestimating it could lead to premature rate cuts, exacerbating inflation.

Why Are Mortgage Rates Still High?

The Fed has cut interest rates twice since September, and it's widely anticipated that they will cut again in December. Yet according to Freddie Mac's weekly Primary Mortgage Market Survey, the average 30-year fixed rate mortgage has risen from 6.2% to 6.81% over the same period.

Mortgage rates rose when the Fed raised rates in 2022, so why aren't they falling now? For context, mortgage rates are loosely based off 10-year Treasury yields. So the real question is--why aren't 10-year Treasury yields dropping in lock-step with the Fed funds rate? There are a couple of primary reasons:

First, long-term rates are predictive. They are based on projections for future short-term rates--not current short-term rates. Before Covid, we were in a roughly 10-year period where inflation was running below the Fed's 2% target, so rates were historically low across the board.

And while we are still in the last mile of the battle, inflation and interest rates are slowly normalizing. So while the 10-year yield feels high, it has actually reached a more healthy level, even though it feels punitive after a deflationary decade with ultra-law rates.

Second, the national debt continues to grow as the government increasingly depends on borrowing to fund its budget. During Covid, the government borrowed to provide many fiscal stimulus programs that allowed for a relatively quick rebound. But they were expensive. And we continue to operate at a deficit.

Like any other security, there are only so many buyers for US Treasuries, so it comes down to basic supply and demand. With a greater supply (more Treasury issuance) and a relatively fixed demand, prices fall and yields rise--prices and yields have an inverse relationship.

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Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@lefleurfinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

Negativity Only Sounds Smart

As children, we love the ever optimistic Winnie the Pooh, in his undersized shirt with no pants, even if he’s not the brightest. And while we feel bad for Eeyore, he is certainly not our favorite. But in adulthood, something shifts–we start gravitating toward negativity and exalting it as intelligence.

In the world of investing, negativity often comes from “permabears,” which is a euphemism given to analysts, commentators, and forecasters who always (permanently) have a bleak (bearish) market outlook. Here’s how to spot them:

• They always think the market is about to drop,

• Incite fear with technical and scary statistics, and,

• Most importantly, paint anyone who disagrees with them as naïve.

Unfortunately, they typically are quite intelligent, have the loudest voice in the room, and sometimes do get it right. And even when they’re wrong, they still claim intellectual high ground by explaining why they “should” have been right.

But here’s the only thing that matters. Pull up a chart of the Dow and zoom out as far as you can–it goes up and to the right, making money for anyone along for the ride. Obviously, I’m not endorsing blind optimism–if you zoom in there are some scary cliffs in 1929, 1987, 2008, and 2020.

However, you shouldn’t let the fear of market dips drive investment timing decisions. If you did, you would have missed double digit returns in 2023, a year in which there was plenty of reason to be fearful: inflation, high interest rates, war in Ukraine, bank failures, renewed conflict in the Middle East, potential government shutdown, escalation of tension with China, etc..

Instead, if you have a short investment horizon (e.g. older investor) or lower risk tolerance (e.g. market volatility keeps you up at night), then lower your equity exposure on the front end, not in response to negative market forecasts.

Allocation is key, and trying to time the stock market is a fool’s errand. Don’t try to outsmart the market, just hop on and settle in for the long haul.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@lefleurfinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

Don't Play It Safe

Higher interest rates are tough for homebuyers, but if you’re fortunate enough to have a little money in the bank, they also mean you can earn a return on cash. And in a post-pandemic world, contending with conflict in Israel and Ukraine, it makes sense that investors want to play it safe on the sidelines with money market accounts and CDs.

But to protect long-term returns, it’s important to fight that urge. A guarantee of 4-5% in a money market account is great for short-term savings, but that’s not where long-term investments belong. Remember, the long-term average for the stock market is about 10%, but that’s only if you stay in the market.

You may be thinking, “I’ll take advantage of these higher interest rates now and just get back in the market later when interest rates have gone down.” That sounds logical on the surface. But think about what that really means when considering the effect of interest rates on stocks–”I’ll sell stocks when they’re cheap and just buy them back when they're more expensive.” Not a great strategy.

Consider interest rate and stock moves last week. The two-year treasury yield dropped from over 5% to 4.8% while the S&P 500 surged 5.9%. Granted, you had to endure a 10% drop from July highs, but after last week, the S&P 500 is still up over 13% year-to-date. It’s a bumpy ride, but that’s what we sign up for as long-term investors.

In 2008, during the height of the Global Financial Crisis, Warren Buffett said, “Be fearful when others are greedy, and be greedy when others are fearful.” Unfortunately, this strategy never feels comfortable at the moment. But it captures the counter-intuitive action necessary for long-term, successful investing.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@lefleurfinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

Reasonable Predictions, Poor Returns

In 2016, sports personality Max Kellerman boldly predicted, “Tom Brady’s just about done. It could be his next game, it could be a year from now, but he is going to fall off a cliff.” Brady then played another six years, winning three more Super Bowls.

That’s a tough call to live down. Kellerman’s prediction has since caused him endless ridicule and internet trolling. Likewise, if investors predicting a market drawdown decide to sit on the sidelines, they could pay the ultimate price with their portfolio–lower returns.

In a recent study by Putnam Investments, investors who put $10,000 in the S&P 500 on December 31, 2007 had over $35,000 by December 31, 2022. However, investors who missed the best ten trading days during that period only had a little over $16,000–less than half their disciplined counterparts.

So when the market goes up, it really goes up. And if you’re on the sidelines, while you may sidestep a few drawdowns, you are more likely to miss out on big market gains. Over the long term, these timing missteps can deeply impact long term returns. In other words, it pays to stay invested.

But investors are nervous, and reasonably so. According to economists polled by the Wall Street Journal, there’s still a 54% chance of a recession in the next twelve months. The primary concern is that the cumulative effect of recent credit tightening may not have fully materialized yet in the economy.

However, investors have anticipated a recession for months. Since October 2022, the market has endured: continued Fed rate hikes, the collapse of FTX , a regional bank crisis, a debt ceiling crisis, and two consecutive quarterly declines in S&P 500 earnings. Yet, the S&P 500 is still up over 20%. So, again, it pays to stay invested.

Not every bull market is a Tom Brady–this one very well may fade after a reasonable run like Peyton Manning. But you can’t win if you don’t play, and we know that the market rewards long term investors.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@lefleurfinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

Invest. Don't Believe.

In the 1991 classic Hook, we root for Robin Williams, who plays an old Peter Pan, to shed the hardened corporate shell of his adulthood and regain the innocence of his youth. And while believing in fairies and thinking happy thoughts may help you fly and defeat Captain Hook in Neverland, such nonsense has no place in investing.

Sam Bankman-Fried, or SBF as he is commonly known, is the Tinker Bell of the FTX collapse, convincing all his Peter Pan-like investors to believe in his magic. They flew high for a while, but when the fairy dust settled, FTX was in bankruptcy and SBF was indicted for fraud.

Despite the bankruptcy and fraud. I think there’s a bigger lesson to learn than just the importance of basic due diligence (FTX had a hole in its balance sheet the size of the Grand Canyon). That lesson is the importance of detachment from emotion when making investment decisions.

You don’t invest in a stock because you “believe” in the company founder or “love” its corporate mission—you invest in a stock because you think it will make money. The internet, especially Twitter, is dominated by very charismatic people, like SBF, whose followers become evangelists, spreading their leader’s word as gospel.

SBF became the quirky but all-knowing face of crypto, even appearing before Congress and bailing out crypto lender BlockFi just months before FTX’s collapse. The public was enamored with his confidence and intellect, which allowed him to attract investors from across the spectrum–from the smallest retail trader to venture capitalist heavyweights, including Sequoia Capital and BlackRock.

Everyone got duped because they simply “believed” in SBF and FTX without properly evaluating them like any investment should be. FTX was sexy and dominated the zeitgeist, so investors were quick to overlook important but boring things like audited financial statements and internal controls.

But sexy and profitable aren’t synonymous, a lesson I actually learned in 11th grade English class. We had to interview someone we admired and write a short biography, so I chose an entrepreneurial family friend. He told me, “I would run a business shoveling pig slop if I thought it would make money.” Not sexy but profitable.

Good investments stand on their own merits—not belief in a charismatic leader. Apple has done just fine after the death of Steve Jobs. His successor, Tim Cook, while not nearly as animated and passionate as Jobs, has successfully led Apple to continued growth and profitability. It’s about fundamentals–not charisma.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

Who Cares About Bonds?

If the stock market is Paul McCartney, then the bond market is Ringo Starr. It’s traditionally seen as boring and stable, but this year, it might as well be Harry Styles selling out his 15-night residency at Madison Square Garden. Every day, headlines are filled will stories about Treasuries, interest rates, the yield curve, and a myriad of other bond related issues.

So what does it all mean? And why should you care? It all comes back to inflation. Interest rates are one of the Fed’s primary tools to bring it back under control—in August the consumer price index was 8.3% while target inflation is 2.0%. Higher interest rates make borrowing more expensive, reducing the appetite for spending and thereby curbing inflation.

While the Fed can only directly influence the Fed Funds Rate (the rate banks pay to borrow money overnight), that rate indirectly influences every other rate from Treasuries and corporate bonds to mortgages and car notes. In other words, there’s a trickle-down effect from the rate banks pay to every other rate in the market.

The most obvious example is mortgage interest rates. Through September of this year, the Fed Funds Rate has increased from 0% to 3.25%, and average mortgage rates have risen from 3.22% to 6.70%. While it may not seem like a huge difference, for a $300,000 mortgage, that creates a $635 increase in monthly payments.

But higher interest rates also affect your portfolio—both stocks and bonds. For stocks, the direct effects are twofold. First, companies must borrow at higher rates, which creates higher interest expenses and lower earnings. Second, higher interest rates lower the present value of future earnings, decreasing the value of the corporate stocks. Indirectly, lower consumer spending also lowers earnings.

For bonds, higher interest rates are good for new bond purchases, but bad for bonds already in your portfolio. For example, if you own Bond A from a company that pays 3%, but the same company later issues Bond B that pays 5%, Bond A will drop in value because it’s paying less in interest. This reality is why bond yields and bond prices move in the opposite direction, which can be counterintuitive to the casual observer.

Bonds are far from boring, and actions by the Fed and other central banks along with reactions from pension funds and major financial institutions can create tremendous volatility in both the stock and bond market—something we observed in the last week of September with the UK. Unfortunately, this volatility will likely continue as the Fed battles inflation, the war in Ukraine disrupts the European economy, and tensions between China and Taiwan create uncertainty.

However, investing is an endurance endeavor, and bad news won’t last forever. A recent poll from the American Association of Individual Investors showed that expectations that the stock market will fall over the next six months recently reached its highest level since March 2009. Interestingly, March 2009 was also the bottom after the 2008 Global Financial Crisis.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

Investing is Hard

The great philosopher Mike Tyson once said, “Everybody has a plan until they get punched in the mouth.” After three years of double-digit gains in the S&P 500, a 20.58% drop through the first half of 2022 feels like a knockout punch. How did you react? Did you stick to your investing plan? Did you even have one?

Successful investing requires a plan—a portfolio allocation that meets your long-term risk and investment objectives. But you have to stick to the plan, which has been a challenge for investors over the last six months. Your ideal allocation can certainly change over time with age and evolving financial priorities, but market moves should not drive that decision.

Unfortunately, emotion and cognitive biases related to changes in the market can cloud judgement and cause investing missteps. Most notably, loss aversion, which is a cognitive bias that causes individuals to feel the pain from loss more than pleasure from gain, makes many investors buy high and sell low—a recipe to lose money 100% of the time.

We’ve all collectively forgotten that investing is hard. Stocks don’t always go up, and you can lose money. Yes, over the long-term stocks have historically provided great returns for investors, but that long-term narrative gets lost when speculators achieve outsized short-term gains like they did in the three years prior to 2022.

Warren Buffett once said of his company, Berkshire Hathaway, “Our favorite holding period is forever.” That doesn’t mean you should never sell--even Buffett sells some of his positions from time to time. But it does mean that you should buy a portfolio you are comfortable keeping for a long-term duration, riding out the ebbs and flows of the market.

Every investor should be aware of what’s going on in the stock market. But day-to-day obsession will lead to poor investment decisions. Check you emotion and remember that investing is a long-term endeavor.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a wealth management and tax advisory firm.

What Will the New Year Bring?

The prospect of a new year is always exciting, but with the cloud of Omicron and inflation hanging over us, it’s hard not to feel like caffeine pill-addicted Jessie Spano in the iconic episode of Saved by the Bell when she dramatically proclaimed, “I’m so excited. I’m so… scared.” That meltdown seems a bit absurd now, but as a kid, it was traumatizing. So maybe some perspective will keep us from feeling scared about economic uncertainty heading into 2022.

Omicron

The new spike in some ways is reminiscent of March 2020 with bowl games and other events being cancelled. But we’ve largely learned to live with COVID as it slowly becomes endemic. More and more individuals have some level of immunity, Omicron seems to be less severe, and our medical community has greatly improved treatment. All these factors should mean each new wave will be less and less disruptive to our economy.

COVID has undoubtedly changed our world forever. We’re all a bit traumatized and exhausted, but our collective genius has created a revolutionary vaccine, made the possibility of work-from-home permanent, and inspired a wave of entrepreneurs to open new businesses—4.3 million in 2020 according to the Census Bureau, which is a 24% increase from the year before. All these developments are positive indicators for the future as we ease in to our “new normal.”

Inflation

Inflation is all over the news, and everyone is making comparisons to the 1970s, an era marked by double digit inflation. And it’s with good reason—any trip to the grocery store or gas station will result in a bigger hit to your wallet that it would have twelve months ago. Even Fed Chair Jerome Powell has abandoned hopes of “transitory” inflation and set the Federal Reserve on course to speed up tapering of its asset purchase program and begin increasing interest rates in 2022.

There’s no way to know how long it will last. But in addition to the Fed’s adjustments, there are three big reasons inflation should not have the same staying power as it did in the 1970s:

1. As COVID becomes endemic, labor and supply chain issues should resolve.

2. Consumers will most likely ease spending as cash reserves from government stimulus runs out.

3. Perhaps most importantly, the psychology of inflation has not yet set in, meaning consumers still don’t expect huge price increases year-over-year.

Summary

We still face the economic headwinds of COVID and inflation, but we have every reason to believe that we will emerge stronger on the other side. In fact, we’ve already seen tremendous improvements. According to data from the Federal Reserve, US households increased their net worth by $13.5 trillion in 2020.

In addition, unemployment numbers have improved drastically, the stock market has handily outpaced inflation, homeowners have seen dramatic appreciation in property values, and borrowers have taken advantage of rock-bottom interest rates. So while there’s still plenty of uncertainty, there’s a lot to be thankful for.

We should absolutely pay attention to the evolving effects of Omicron and inflation on our economy, but let’s not panic. Focus on a long-term investment strategy and long-term returns.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Josh Norris, CPA, CFP, CFA is the managing member of LeFleur Financial, a tax services and wealth management firm.