Welcome to the New Year

Happy New Year from US Advisory Group! With the kickoff of 2024, we want to use this opportunity to share our thoughts and perspectives on a rollicking 2023 and what we are seeing as we look ahead into 2024. This 3-page, relatively brief and high-level, newsletter includes:

  1. What’s New at the US Advisory Group Offices & What’s Ahead in 2024
  2. A Macro-Economic Overview
  3. Investment Insights and Planning Strategies for the New Year

What’s New at USAG

After a very busy 2022 migrating onto our new platform at LPL Financial, one of our main goals of 2023 was ensuring our clients and systems were introduced to and enhanced by the new capabilities on the platform. Virtually 100% of our clients now have access to Account View where clients can see real time data of all their accounts they have with US Advisory Group through a single log in.

Furthermore, we’ve gotten back to our roots with Financial Planning to complement Investment Management. Our new Goal Planning Tool is much more user-friendly than our previous software, and clients can easily enter additional financial data for accounts held elsewhere in order to accurately track their progress towards their goals, which we think is great!

We also added a number of new clients and families to the firm in 2023, almost entirely due to referrals from our trusted partners in the legal & accounting fields, as well as through our clients & friends – Chris & I want to stress how much we appreciate a referral, as there’s nothing that quite says our work is appreciated by connecting people who trust your advice and opinions to our practice – we can’t say it enough – THANK YOU!!!

Geographically, most of our clients continue to live on the North Shore, but due to folks’ continuing comfort with virtual appointments, we have added to the list of folks on the Cape and across the country (we see you down there in St. Croix!). All the states that we are registered to offer financial advice in are listed in our firm’s compliance documents. Please don’t hesitate to ask us if you would like more information about connecting with friends & family outside the North Shore.

In addition to the investment portfolios that we manage and tend to spend the most time in meetings talking about with clients, there are other financial tools and services that have come up recently in client meetings.  We have been busy helping people with educational accounts (529s) and conducting Life Insurance analyses for growing families. Many people have asked us about cash alternatives for those seeking some yield with minimal risk.  We have short-term cash management tools here that have become quite popular and we’re happy to help in that space as well.  These tools are all part of our array of options for helping you protect your assets and build towards your future goals.

We have continued our normal schedule of quarterly/semi-annual/annual Client meetings, and we expect to get back to offering clients the opportunity to hear directly from some of the most intelligent portfolio managers in the world. While generally those will be virtual events (and we know how much people love sitting in front of their computers…), we have found that clients who have attended those events have found them to be immensely valuable and informative, and we will be opening those up to our Clients friends & families in 2024 as well – please feel free to invite folks you think might benefit from these Investment Insights!

Look also for future in-person events, likely to kick off after Tax Time, as an opportunity for us to get together over a cold beverage, relax, and talk about some of the economic and/or investment scenarios we discuss here in the office on a regular basis.  In the meantime, our doors and phones are always open during regular hours for drop-ins and to help with anything that comes up.

Macro-Economic Thoughts from USAG

Speaking of economic scenarios… 2023 was a turbulent year in the global economy but by and large, it was a positive year for growth. Many indicators would have led you to believe otherwise, such as geopolitical challenges in Ukraine & the Middle East, the global struggle to normalize interest rates post-COVID, and adapting to a new normal in commercial real estate markets but through it all, staying invested and blocking out emotion led to some pleasant, if not surprising, investment results over the past 12 months.

The US has done relatively well compared to other developed global economies by GDP but still has massive debt from the influx of COVID dollars that future generations will be repaying. Many people in our country have never experienced inflation quite like what we saw in the earlier part of 2023, and we know how burdensome that can be on your budgets and spending. Fortunately, inflation is cooling now, and prices are beginning to normalize.

Looking ahead, we are sailing into (another!) Election Year with the Iowa Caucuses around the corner and New Hampshire’s primary on Jan 23rd. We expect the already elevated political rhetoric to continue to spike, and while that may be a major cause of jitters at home, we don’t expect that to drive major economic swings in 2024.

What will continue to be of more consequence is the handling of inflation and interest rates. The Fed has signaled it is done with raising rates in the short term, and whether that is actually accurate, rates stabilizing in the back end of 2023 helped boost a rebound of many sectors of the domestic economy in the 4th Quarter.

Investment Insights and Planning Strategies

What did the investor experience look like in 2023? For much of the year, there was a major disparity in US Large Cap equities – typically the engine of peoples’ equity portfolios – between “the market” and “The Magnificent Seven.” We talked often about who those companies are and how they took a hold of the indexes with huge years in 2023. The Magnificent Seven consists of Amazon, Apple, Alphabet (Google), Meta (Facebook), Microsoft, Nvidia and Tesla, all tech companies, and companies we would typically see struggle in a high interest rate environment.

Indeed, Nvidia and Meta were the top two performers in the S&P 500 index in 2023 with Tesla and Amazon both in the top 20 as well.  All these companies have been leaders in the Artificial Intelligence boom and successfully beat concerns that high interest rates would stymie growth stocks.

We liked some of these large cap growth companies in 2023, but with rates high and the likelihood for growth muddled by the various concerning factors mentioned above, we generally favored a more risk-off approach on our equity portfolios.  While we had some exposure to these tech companies through a variety of thematic and/or indexed ETFs, the core of our equity positions remained in the Dividend Growth and Value spaces, which generated steady income and less risk, but underperformed pure growth strategies.

With interest rates holding steady or possibly/likely declining in 2024, we can expect more room for the growth companies to run.  But we think value stocks, by nature, are due for a bounce as well. And not to be forgotten, fixed income investing presents an opportunity for more growth than we have seen in almost a decade. Bonds are generating a higher percentage of yield than we have seen in years, and with the potential for interest rate cuts to boost bonds’ underlying value, there’s opportunity here that we are excited about, particularly to assist our more conservative portfolio models. We have also and will continue to add duration to our fixed income positions, not by leaps and bounds, but conservatively moving out a bit away from short-term positions into bond portfolios with slightly longer durations.

As for specific strategies, 2023 saw an introduction to the use of buffered strategies inside many of our models to hedge equity risk and that should continue into 2024, and we also remain believers in institutional real estate (staying clear of office and retail) as a further alternative to equity and fixed income investments.

On the planning front, we are working to prepare our clients for the Sunsetting of the Tax Cuts & Jobs Act provisions in 2025 that will impact estate tax thresholds on the federal level and may have trickle down effects on some of the financial planning tools we use to help protect clients and families when it comes to taxes and asset protection – we will be discussing this on a client-by-client basis in 2024!

In closing, we would like to wish all of you a wonderful, prosperous, and healthy 2024 – we look forward to a great year ahead full of opportunity and joy, and we thank you from the bottom of our hearts for your trust in helping you and your families navigating a successful path to your financial well-being!

Yours sincerely,

Tucker McDonald                                                                                     Chris McDonald

President                                                                                                   CEO

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing includes risks, including fluctuating prices and loss of principal.​

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USAG’s Year in Review and Outlook into 2022

While the Global Economy worked to get back to normal after a tumultuous 2020, investors found continued sources for optimism amid a world of rising inflationary pressures and global and domestic political and policy uncertainty.

We first look at the relevant storylines and hot topics of the year, then consider the impact these events made on the investment markets. Later, we discuss potential opportunities and headwinds as we look out into 2022. We look forward to conversations with you in greater detail and noting the impact on your financial plans during our regular one on one reviews in the coming new year.

The Pandemic and Inflation

As much as we’d prefer not to start here, it remains clear that the global economy in 2021 was massively affected by COVID, Vaccines, and Healthcare policies around the world. After early fits, we saw a generally successful global vaccination roll-out in early 2021 and then a relatively quick tapering of population vaccination percentages coming through Summer 2021. Vaccination status has, improbably, become in the US almost a political stance, and despite government and business mandates, approval for additional vaccination use & boosters, the US has seen a rather modest increase in overall vaccination rates since late September.

Vaccination Rate chart via ycharts.com

Why is the vaccination rate one of the first things we look at when concerned with the growth of the economy? The number of cases and the contagious nature of the new variants is restricting the full opening of the economy. The chart below highlights the ongoing recovery of four subsets of the service industry since the beginning of the pandemic. Without getting these numbers back to pre-pandemic numbers, the economy has struggled to fire on all cylinders. Hotels, restaurants and air travel industries are still hampered by restrictions and caution taken due to the virus.

Source: AppAnnie, Chase, Mortgage Bankers Association (MBA), OpenTable, STR, Transportation Security Administration (TSA), J.P. Morgan Asset Management. “Beginning 3/15/2021, all indicators compare 2021 to 2019. Prior to 3/15/2021, figures are year-over-year. Consumer debit/credit transactions, U.S. seated diners and TSA traveler traffic are 7-day moving averages. App Annie data is compared to 2019 average and includes over 600 travel and navigation apps globally, including Google Maps, Uber, Airbnb and Booking.com. Consumer spending: This report uses rigorous security protocols for selected data sourced from Chase credit and debit card transactions to ensure all information is kept confidential and secure. All selected data is highly aggregated and all unique identifiable information – including names, account numbers, addresses, dates of birth and Social Security Numbers – is removed from the data before the report’s author receives it. Guide to the Markets – U.S. Data are as of November 30th, 2021.

Inflation has also been a big part of the story in 2021 and we expect that to continue looking ahead. The domestic and global response to COVID involved a massive amount of debt spending and cash infusion from national governments, and with that flood of money into the economy, inflationary pressures were due to rise at some point. What began as highly concentrated pricing increases have flattened in some cases and broadened to other sectors. This is due to the almost instant move in Spring/Summer 2020 in the US. We saw a shocking shift from a Service-based to a Goods-based Economy that struggled to produce leading to a supply chain failure. As supply-chain worries eased in the 4th Quarter, we are still seeing atypically high demand in some sectors of the economy that continue to push prices higher. This chart shows the steady rise of the inflation rate throughout the 2nd and 3rd quarters of 2021.

Annual inflation rate in the US accelerated to 6.8% in November of 2021, the highest since June of 1982, and in line with forecasts. It marks the 9th consecutive month the inflation stays above the Fed’s 2% target as global commodities rally, rising demand, wage pressures, supply chain disruptions and a low base effect from last year continue to push prices up. Upward pressure was broad-based, with energy costs recording the biggest gain (33.3% vs 30% in October), namely gasoline (58.1% vs 49.6%). Inflation also increased for shelter (3.8% vs 3.5%); food (6.1% vs 5.3%, the highest since October of 2008), namely food at home (6.4% vs 5.4%); new vehicles (11.1% vs 9.8%); used cars and trucks (31.4% percent vs 26.4%); apparel (5% vs 4.3%); and medical care services (2.1% vs 1.7%). On the other hand, the inflation slowed for transportation services (3.9% vs 4.5%). Excluding food and energy, inflation went up to 4.9% from 4.6%, the highest since June of 1991. source: U.S. Bureau of Labor Statistics

Political & US Domestic Policy Notes

Obviously, the year began with a substantial swing in political direction in Washington, which poses major ramifications for investors. However, as we’d said entering 2021, the policies of the Biden White House, while certainly impactful for the larger economy and for investors, did not cause a material headwind to (in a massive over-generalization) US Equity market growth in the short term. As we have talked about for a while now, much of 2021 (and likely 2022 as well) will still be overwhelmingly affected by the digging out from COVID and getting global economies back to pre-COVID levels.

That is not to say that there are not major issues that investors will be facing due to Democratic policies rolled out in 2021 – The Infrastructure Bill that passed in November 2021 will be pumping additional dollars into the US economy for years to come; and while the Build Back Better bill appears at this date to be more-than stuck, there are a number of impactful policies that remain popular that we expect to see some version of in 2022. We also saw a passage from a House Committee of the SECURE Act 2.0 (following up from December 2019’s passage of the SECURE Act) in May 2020 that seemed likely to move through Congress until it was stalled by other legislative priorities – more on that below.

Chairman Powell & Fed Policy has also been highly impactful for investors this year. We expect several Fed Fund Rates increases in 2022 – at the moment, market sentiment is expecting 2 or 3 rate increases in 2022, beginning in March – but there remains a high degree of uncertainty as we see what the economic/productivity impact of a Omicron-filled Holiday season will be in the US (amid other factors).

Turning to the Markets

Equity Market Trends for 2021 are highlighted below by Style & Size as well as the VIX Volatility Index.

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Style has Russell Indices. Low Vol (MSCI USA Min Vol Index), Momentum (MSCI USA Momentum Index), Quality (MSCI USA Quality Index). The Style Boxes here help understand what areas of the market were positive and what lagged behind during the year. Source: Morningstar as of 11/30/2021.

The VIX is a real time market index representing the market’s expectation for volatility over the coming 30 days. Chart as of 12.29.21

Our biggest takeaway from the year was the tepid reversal back towards a service-oriented economy, which we expect to continue into 2022. We see valuations are relatively high, but we saw a strong Q4 corporate earnings season to justify those numbers – while wage growth is up and unemployment numbers are trending down, we will continue watching earnings closely.

One tool we use to gauge the temperature and direction of the market is the value dispersion chart of the SP500. It is a great reminder of the importance of active management in portfolios, as the spread between highest- and lowest-performers of the S&P 500 has spiked recently and the industries that have escaped the pandemic’s wrath have become big winners. This is also something we have been talking about for many months now and we see no reason to expect that trend to stop.

Source: Computed, FactSet, Standard & Poor’s J.P. Morgan Asset Management
Guide to the Markets – US Data are as of November 30, 2021.

On the Fixed Income side of the world, we should start with the current Fed Dot Chart – which shows where Members project the fed funds target rate to be in the future.

The Federal Reserve’s “Dot Plot” signals its outlook for the path of interest rates

Clearly a rising interest rate environment puts pressure on bond prices, which means that to find greater return in the fixed income world, you are looking at notes that are riskier. Having said that, fixed income investors are not new to this world or concept, as we have been facing a rising-rate world for quite some time. The Fed’s dot plot and Fed Fund Futures have both homed in on two to three rates hikes in 2022 and the Fed’s latest Summary of Economic Projections pointed to a long-run policy rate of 2.5%, holding steady from September 2021’s report.  Equities appear comfortable with that call as markets rallied post December 15th’s press conference. The major issue to avoid is taking on undue risk for inappropriate returns – many investors look at fixed income positions to provide stability and protection around their equity portfolios and taking on undue runs counterproductive to that end. We will be watching broader trends in the space as we look to balance asset preservation with growth.

What else are we looking at in 2022?

First, let’s go back to the global pandemic, and while the falling hospitalization and fatality rates for Omicron cases is (relatively) encouraging, there are still myriad COVID-related issues that could cause market turmoil or opportunities. We remain optimistic that economic-impacting policies will be adjusted if we continue to see lower hospitalization rates, particularly among the vaccinated population.

Second, Legislative & Fed Policy Changes are in the works for Q1 2022. The SECURE Act 2.0 Bill that seems to be getting reworked into the legislative calendar for 2022 will be relevant for many clients & we will have updates to come as that works its way through Congress after the New Year. And obviously Fed signals are scrutinized and have market-moving potential that we are watching closely.

Third, lest we forget, there is another federal Election coming up in November 2022 that has the potential to cause major policy and legislative changes – we are not in the business of political prognostication, but history would lead us to think the House tends to revert to the Party not in the White House in a mid-Term, and we expect a close outcome overall.

And finally, the typical global hotspots are always potential sources for turmoil – the Russians are massing in Ukraine, Iranian saber-rattling continues, non-state (real or titular) cyber threats seem not to be quelled by the Biden White House’s threats, and China, while dealing with their own massive internal issues, has no shortage of ways to stir instability.

Final Thoughts

Bumpier progress on the Pandemic than expected has slowed future growth projections slightly from earlier in 2021 but here are some reasons for our optimism.

  • We expect much less Federal Stimulus in 2022 compared to 2020 and 2021 but stimulus is still working its way through the economy – private investment in the economy, not government spending, should do wonders for economic growth
  • A still-recovering economy signals potential room for continued growth but that may taper as we get back to pre-pandemic levels of economic output
  • Wages should continue to grow & the demand for labor will also increase

This new year is poised to be a positive year in the markets, but when looking out beyond the next 12 months, there are obvious headwinds in the US equity markets that may emerge. We will continue to create investment solutions for our clients that meet and exceed their goals and objectives, adjusting when necessary if need should arise.  We are thankful for the trust our clients place in us and for the information we use that is shared with us through our professional network of experts and we will continue to issue our updates and commentary in the months ahead!

Have a safe and healthy start to the new year.

  • US
    Advisory Group
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