Delta Wealth Solutions Strategy Lab
Welcome to the Strategy Lab. The Delta Wealth Solutions Strategy Lab focuses on providing the necessary insights to help clients achieve optimal investment and planning outcomes. Please check back regularly for our quarterly market newsletter along with commentary on the stories that move markets.
April 2024
Nothing Comes Easy
Delta Strategy Lab - Quarterly Market Update
This time of year, many people begin getting the itch to go outside and get back in the swing of gardening and yardwork. Folks will be comparing their own yard to their neighbors and attempting to figure out the best way to get the flowers to bloom in the garden. This feels like a time honored tradition in most American neighborhoods. The funny thing is there are seemingly no results at the onset of ones labor. For example, spreading fertilizer over the yard wont result in a green up in the next ten minutes. Instead, it will take weeks of watering and mowing to bear the fruit of dropping one bag of overpriced fertilizer. Furthermore if a family plants a tree, that family might move before the tree is even fully grown! The old proverb states, “The best time to plant a tree was 20 years ago, the second best time is today!”
Similarly to our outdoorsy friends, investors don’t always see an immediate result from their labors. Executing an asset allocation and rebalancing strategy is a timely process that takes the entirety of an investors time horizon. Recently, we saw the S&P 500 peak in January 2022 and then fall considerably throughout the year. The S&P 500 wouldn't find another all time high for over two years until the first quarter of 2024. The work of investors took a considerable amount of time through the most recent market cycle and has paid dividends for those equity investors who executed their strategy and remained invested for the long haul. The upcoming phase for investors is similar to the neighbor meticulously caring for their yard. The next round of fertilizer will always be just around the corner, just as the next rebalancing opportunity for investors will inevitably always be just around the corner as well.
Where do I stand with my financial plan?
The past six months have been generally positive for diversified investors, as market interest rates have fallen over that time frame and stocks have generally increased in price. In December, Federal Reserve Chairman Jerome Powell announced that the Fed will pivot from their rate hiking cycle, and both fixed income and equity investors cheered this change of direction. Going forward, the path remains uncertain. Will rates come down quickly or stay elevated for some time? Will inflation rear its ugly head once again? Will earnings growth broaden for the S&P 500 or retract to just a few stellar companies? What investors do always have in their pocket is the control variables for their plan, such as asset allocation and rebalancing. If markets were to correct (decline) for a period of time, that would provide investors an opportunity to rebalance back into stocks at lower levels and prepare for the next phase of the market cycle. Likewise, if markets continue to appreciate then taking equity gains off the table could be in play. Whatever the future holds, Delta Wealth Solutions stands ready to assist clients along the way.
“The odds that you will achieve long-term success by actively trading or timing the market round to zero.” Morgan Housel
2024 off to a Hot Start
How easy it is to forget the challenges investors were facing 12 months ago. In March of 2023 inflation was still over 5%, the stock market as measured by the S&P 500 was still digging out of a 27% drawdown, and Silicon Valley Bank was collapsing marking the second biggest banking failure in US history1. Twelve months later interest rates have stabilized, inflation is decelerating, and multiple global stock market indices are hitting new all-time highs. With hindsight being 20-20 it may feel as though it was an “easy” path through it all, but in October of 2022 with balanced portfolios experiencing the largest drawdown in 100 years, rest assured nothing felt easy.
As of the end of 1Q 24 the S&P 500 experienced a total return on the quarter of 10.56% with 9 of 11 market segments on the Callan chart, listed later in this newsletter, in positive territory. The introduction to this newsletter hits home to the theme of this quarters content, “Nothing Comes Easy.” In a normal year the stock market averages three declines of 5% or more, and one decline of 15% on average2. It’s been nearly two years since the S&P 500 has experienced a decline of 10%+ and in our view, we would not be surprised to see a normal pullback in the coming months.
Even though we can make the argument for a market correction in the short-term that does not mean many aspects of the global economy aren’t improving. The labor market is continuing to normalize, earnings are hitting all time highs, and interest rates as controlled by the federal reserve are likely to have hit their terminal rate last year and should slowly decline in the second half of 2024. Investor success never comes easy and after a period of relative calm in the markets we encourage investors to stay focused on their financial goals, maintain proper asset allocation, and stay diversified going into a year that could see some significant headline risk.
The AI Revolution, Does it Matter for Stocks?
Artificial intelligence (AI) has been something discussed in books, newspapers, and movies (see iRobot with Will Smith) for decades and according to Precedence Research3 AI is expected to become a $2.5 trillion+ market over the next decade. In January 2023 Microsoft made a multi-billion dollar investment in Chat GPT4 and the AI arms race was off. There is a lot of discourse around what does AI actually mean and what are the applications to people around the world and more directly the impact on equity investments. While we remain skeptical on the 4 day workweek being implemented globally anytime soon due to the technology, there are likely to be significant benefits. According to WSJ writer Bart Ziegler, “Artificial intelligence is a broad term, covering a multitude of technologies, so definitions differ. But it helps to think of it literally: It is digital technology that mimics the analytical ability of human intelligence, largely by finding patterns in the information it is fed or encounters.”5 Some real world examples of the technology in action can be found in Tesla’s “self driving” software. As the vehicle drives different areas of a city or a landscape the challenges and features are stored in memory similar to a pattern. The artificial intelligence learning language uses these experiences to implement (hopefully) better driving execution in the future. Another more cynical example is Microsoft’s Chat GPT interface has the ability to write novels, songs, papers that could take students hours in a matter of seconds.
In our view, the key takeaway from AI is the ability to significantly increase workplace productivity. Higher productivity allows for faster GDP growth, potentially higher margins for companies, and more profits. The larger question looming is have AI benefactor stocks gone too far too fast. Companies like Nvidia, a large-cap growth stock producing semiconductor chips for AI related uses and Super Micro Computer, a small-cap growth stock providing server and storage solutions for AI have seen significant increases in the value of their share prices over the last 18 months and their valuations sit at levels one could question bubble territory. Though thus far, both companies have had their earnings power through and investors have been largely vindicated. Will this continue, it’s likely too early to tell.
Source: Precedence Research www.precedenceresearch.com 2024
Stocks Likely to Follow Earnings
Though there has been some caution for investors provided in this newsletter, the single most important metric for continued stock appreciation is still trending in the right direction. Stocks over the medium to long term typically follow corporate earnings. Earnings have been and are expected to continue hitting all-time highs over the next twelve to eighteen months6.
The bear market experienced in 2022 was largely followed in tandem by declining earnings expectations. The rally experienced in markets last year was also mirrored by improving forward earnings expectations. With Q1 earnings and forward guidance being reported in the coming months investors will gain some insight into whether this positive trend is likely to continue. As of this writing 13 companies have reported Q1 earnings with 92% of companies topping their estimates (above trend). Furthermore all five of the sectors reporting are signaling realized earnings growth in the 1st quarter.7 In our view, it’s likely this trend will continue in the foreseeable future.
Source: Carson Investment Research, Factset 03/31/2024
Keep Tending the Garden
As investors and outdoor enthusiasts move into April and beyond there is an old saying, “April showers bring May flowers.” This saying originates from the United Kingdom where April is a traditionally dreary and rainy month, but in the process the rainfall gives bloom to new plant life in May. For investors, the rain/pain of 2022-2023 gave the market a new base to regroup and spring new life to all-time highs which investors are enjoying currently. No one knows exactly what the future holds as corrections, bull-markets and recessions unfold, but just like tending to a garden we encourage investors to follow a process and focus on the long-term rewards rather than the short-term challenges.
Added Disclosures: Indexes shown: S&P 500 Value, S&P 500 Growth, S&P Mid Cap 400, S&P SmallCap 600 Growth, S&P SmallCap 600 Value, ICE BofA High Yield Bond Index ETF, Barclay's Aggregate Bond Index, MSCI World Index ex. US, S&P 500 Real Estate, and Morgan Stanley Capital Index Emerging Markets. This is not an official representation of your asset allocation. The percentages could be subject to transcription error. Data provided by S&P Capital IQ, Morningstar Research, MSCI. Data as of 03/31/2024.
1. What Happened with Silicon Valley Bank? - WSJ, www.wsj.com/articles/silicon-valley-bank-svb-financial-what-is-happening-299e9b65. Accessed 8 Apr. 2024.
2. Schwab.com. “Market Corrections Are More Common than You Think.” Schwab Brokerage, www.schwab.com/learn/story/market-corrections-are-more-common-than-you-think. Accessed 8 Apr. 2024.
3. “Artificial Intelligence (AI) Market (by Offering: Hardware, Software, Services; by Technology: Machine Learning, Natural Language Processing, Context-Aware Computing, Computer Vision; by Deployment: On-Premise, Cloud; by Organization Size: Large Enterprises, Small & Medium Enterprises; by Business Function: Marketing and Sales, Security, Finance, Law, Human Resource, Other; by End-Use:) - Global Industry Analysis, Size, Share, Growth, Trends, Regional Outlook, and Forecast 2023-2032.” Precedence Research, www.precedenceresearch.com/artificial-intelligence-market. Accessed 8 Apr. 2024.
4.Q.ai - Powering a Personal Wealth Movement. “Microsoft Confirms Its $10 Billion Investment into CHATGPT, Changing How Microsoft Competes with Google, Apple and Other Tech Giants.” Forbes, Forbes Magazine, 20 Feb. 2024, www.forbes.com/sites/qai/2023/01/27/microsoft-confirms-its-10-billion-investment-into-chatgpt-changing-how-microsoft-competes-with-google-apple-and-other-tech-giants/?sh=2c16432d3624.
5.Readers Have a Lot of Questions about AI. We Answer ..., www.wsj.com/tech/ai/artificial-intelligence-questions-answered-137f116c. Accessed 8 Apr. 2024.
6. Varghese, Sonus, “Forward Earnings Expectations surge in Q1” Carson Research, FactSet. 31 Mar. 2024.
7. The Earnings Scout “”The Earnings Scout Report Q1 Scorecard” 27 Mar. 2024.
Disclaimers and Disclosures
This commentary on this newsletter reflects the personal opinions, viewpoints and analyses of the Delta Wealth Solutions, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Delta Wealth Solutions, LLC or performance returns of any Delta Wealth Solutions, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website/newsletter constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Delta Wealth Solutions, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Delta Wealth Solutions, LLC a Registered Investment Adviser. This newsletter is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Delta Wealth Solutions, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Delta Wealth Solutions, LLC unless a client service agreement is in place.
The hypothetical information provided is back-tested performance, was compiled after the end of the period described and does not represent decisions made by Delta Wealth Solutions, LLC.
Specific note concerning graphs, images, charts, formulas, or any other visuals: Delta Wealth Solutions, LLC provides such exhibits for informational purposes only and the data provided alone should not be considered investment advice and should not in and of itself be used to determine which securities to buy or sell, or when to buy or sell them. Any graph, image, chart, formula, or visual should be only be considered in its specific context within this newsletter and from the original source where it is derived. Any use of a graph, image, chart, formula, or other visual is not a solicitation to buy or sell securities in any manner. Any investments should be considered thoroughly and discussed with the readers Financial Advisor.
This publication has been prepared by Delta Wealth Solutions LLC and may not be reproduced or distributed without the consent of Delta Wealth Solutions LLC. This document is for informational purposes only and is not an offer, or solicitation, to buy , sell or hold any financial product or investment. The analysis contained within this publication should not be considered a recommendation and does not take into account the specific goals, objectives, or needs of any recipient. Past performance is no indication of future results and different assumptions could create results that materially alter from the information conveyed in this publication. The opinions and information conveyed within this publication were procured by sources deemed to be reliable. This report is up to date as of the date and time reported on page 1 of this publication.
More information about Delta Wealth Solutions LLC can be found on our website at www.deltawealthsolutions.com, calling us at 816-810-4467, or e-mailing info@deltawealthsolutions.com. Delta Wealth Solutions is a Registered Investment Advisor in the State of Missouri.
