Presents our

Bi-Monthly

 ERPE Excerpts

John J. Gardner, CFP®, CPM®

blackhawkwealthadvisors.com

Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

July 18, 2024

Achieving Portfolio Optimization:

Buffer Funds

Portfolio optimization can be defined as reducing risk without sacrificing return. Investors have lots of ways to invest with low risk, but get low returns. That is not optimal. Investing with a chance to gain stock market returns while eliminating most if not all the stock market risk will result in portfolio optimization. This is the investment world’s version of “have your cake and eat it too.”  While such a low risk/high return investment may sound unrealistic, it exists. It is called a “Buffer Fund”. These are unique investments that are ideal for investors who might love stocks but hate losing money in a falling market. So, what is this optimal investment and how does it work? With the objective of delivering both the upside of stocks and downside protection, Buffer funds work as a defined-outcome investment. They come with a risk-reducing “buffer” (what you get) and cap, or limit to what it will return (what you give).  For most conservative investors, this risk reward trade off is suitable and attractive.

Portfolio Strategies

There are many ways an investor can integrate buffer ETFs into their portfolios. First, because such investments boost stock exposure with less risk they allow an investor with a low risk tolerance and little exposure to stocks to achieve potentially higher returns. For example, an investor who holds 70% bonds and 30% stocks may consider upping their stock allocation to 40% (adding a 10% buffer allocation) and trimming their bond holdings to 60%. Also, buffer ETFs can be a prudent substitute for cash or bonds. Investors who are close to retirement may be looking for more growth via stocks. Shifting a portion of a bond portfolio to a buffer ETF may provide more growth while keeping portfolio risk in check. As noted above, they can be a compelling alternative to Treasuries and other bond instruments. Lastly, buffer ETFs can serve as a stock diversifier. They can add a defensive slice to a stock allocation, where the general goal is to reduce equity declines during down markets.

Perspective on downside risk

While the stock market by its nature is volatile, having proper perspective on downside risk is helpful. Since the primary benefit of buffer ETFs is downside protection and risk reduction, perspective of the stock market’s historical annual returns can help investors avoid “wearing a belt and suspenders”. Choosing a buffer ETF with a 100% buffer may be too conservative and sacrifice greater gains. From 1928 through 2023, the S&P 500 experienced 26 calendar-year losses. Only 3 of those 26 losses was greater than 30%. So, a buffer of more than 30% may be playing it too safe. Here’s the history of the S&P 500’s returns:

Annual Returns for the S&P 500 (includes dividends)

1931 -43.84%

2008 -36.55%

1937 -35.34%

1974 -25.90%

1930 -25.12%

2002 -21.97%

2022 -18.04%

1973 -14.31%

1941 -12.77%

2001 -11.85%

1940 -10.67%

1957 -10.46%

1966 -9.97%

2000 -9.03%

1962 -8.81%

1932 -8.64%

1946 -8.43%

1929 -8.30%

1969 -8.24%

1977 -6.98%

1981 -4.70%

2018 -4.23%

1990 -3.06%

1953 -1.21%

1934 -1.19%

1939 -1.10%

1960 0.34%

1994 1.33%

2015 1.38%

2011 2.10%

1970 3.56%

2005 4.83%

1947 5.20%

2007 5.48%

1948 5.70%

1987 5.81%

1984 6.15%

1978 6.51%

1956 7.44%

1992 7.49%

1993 9.97%

2004 10.74%

1968 10.81%

2016 11.77%

1959 12.06%

1965 12.40%

2014 13.52%

1971 14.22%

2010 14.82%

2006 15.61%

2012 15.89%

1964 16.42%

1988 16.54%

2020 18.02%

1952 18.15%

1949 18.30%

1986 18.49%

1979 18.52%

1972 18.76%

1944 19.03%

1942 19.17%

1982 20.42%

1999 20.89%

2017 21.61%

1983 22.34%

1963 22.61%

1996 22.68%

1951 23.68%

1967 23.80%

1976 23.83%

1943 25.06%

2009 25.94%

2023 26.06%

1961 26.64%

1998 28.34%

2003 28.36%

2021 28.47%

1938 29.28%

1991 30.23%

1950 30.81%

2019 31.21%

1985 31.24%

1989 31.48%

1980 31.74%

1936 31.94%

2013 32.15%

1955 32.60%

1997 33.10%

1945 35.82%

1975 37.00%

1995 37.20%

1958 43.72%

1928 43.81%

1935 46.74%

1933 49.98%

1954 52.56%

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“A nation’s strength ultimately consists in what it can do on its own, and not in what it can borrow from others.”

~~ Indira Gandhi, 1970

What Happened On This Day July 18, 1940 – FDR is nominated for an unprecedented third term.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Confirmed Uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. It is still green. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Confirmed Uptrend. From November 1 to last week the market was in a Confirmed Uptrend. Market action on April 12 triggered the weakened trend signal to Uptrend Under Pressure. After running higher 18 out of 22 weeks, the SP 500 fell 3 consecutive weeks. May 16 market action changed that again, triggering a positive trend change back to Confirmed Uptrend.

Here are key market levels as of Monday, July 15.

Recapping Last Week

A softer-than-expected inflation report provided further justification for the Federal Reserve to start lowering interest rates later this year. Conversely, it also triggered a massive rotation out of high-flying, mega-cap technology stocks. The combination of these factors led to mixed performance for U.S. equity indices. The S&P500 index rose less than 1% to close at yet another all-time high, while the Nasdaq Composite gained just 0.3%. Small-cap and mid-cap stocks soared as Treasury yields plunged, with the Russell 2000 jumping 6% and the S&P Midcap 400 rising 4.4%. S&P500 sector breadth was overwhelmingly positive despite the index’s muted performance, as struggling sectors such as healthcare, real estate, and utilities strongly outperformed. The S&P500 equal weight index outperformed its cap-weighted counterpart by more than two percentage points last week, illustrating the remarkable shift in breadth. U.S. Treasury yields sank on Thursday after June CPI declined 0.1% MoM, putting the 12-month rate at a three-year low of +3.0%. In Congressional testimony, Fed Chair Powell emphasized that he is paying closer attention to the risks of a cooling labor market as inflation trends lower. Although Powell wasn’t specific about the timing of an initial rate cut, markets now firmly expect a quarter-point reduction at the September meeting, according to the CME FedWatch tool. In other economic news, U.S. consumer sentiment unexpectedly fell to an eight-month low; however, inflation expectations for the next year dropped for a second straight month, to 2.9%. Consumer credit jumped in May as Americans increased credit card balances. On the earnings front, shares of Wells Fargo, Citigroup, and JPMorgan Chase fell, even as the latter two beat expectations.

Internationally, the euro gained ground versus the U.S. dollar despite France’s muddy election results, boosting the MSCI EAFE index to a 2.3% weekly gain. In the UK, the new Labour government received some good economic news as May GDP was stronger than expected. However, a stronger economy may make the Bank of England more hesitant to start cutting interest rates. Finally, China’s consumer prices continued to grow at a slower pace than forecast, with CPI increasing just 0.2% YoY in June, while producer prices fell 0.8% as excess manufacturing capacity remained an issue. China’s imports fell 2.3% YoY in dollar terms, while exports climbed 8.6%. By yesterday’s close, the “Magnificent Seven” had collectively lost $1.128 trillion in market cap over the last five trading days. That’s the largest five-day market-cap loss since May 2022

Current View

For days, the Nasdaq composite and S&P 500 remained undisturbed even as major tech stocks weakened on the stock market. All that ended abruptly yesterday. The Nasdaq, home to the mega-cap tech growth stocks that have soared, took the biggest hit. The index had its worst day since 2022. As the “great rotation” continued with growth falling and value rising, yesterday was the first day since 2001 when the Nasdaq fell more than 2.5% and the Dow gained. Particularly, semiconductor stocks took a beating yesterday on news that the Biden administration may clamp down even harder on chip exports to China, while Donald Trump told Bloomberg BusinessWeek that Taiwan should pay for U.S. military protection. Taiwan Semiconductor, a major supplier for companies such as Apple and Nvidia, led the chip stocks down.

All the major stock indexes are lower this morning, reversing a higher opening. Profit taking is evident after a big bull run and the rotation out of growth to value is evidently gaining momentum. In general, the U.S. stock market remains is a confirmend uptrend.

• Industry Group Strength:  BULLISH. As of yesterday, 131 out the 197 groups I monitor are up year-to-date. 66 are down.
• New Highs vs. New Lows: BULLISH. As of now, there were 471 new 52-week highs and 55 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.94%. The 10-year Treasury now 4.18%.
• Volatility Index: BEARISH. Volatility has been volatile. The “VIX” is near 16. It was 13 two weeks ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BEARISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 51, the Fear & Greed Index is down from 42 2 weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  BEARISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 63.6%. The bear sentiment is now 16.7%. This reflects an increase in bullish and decrease in bearish sentiment over the last 2 weeks. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.  Note how close market sentiment is near the 5-year bullish high and near the 5-year bearish low…

• Put / Call Ratio: BEARISH. The ratio of put-to-call options is 0.46.  It is up from 0.34 two weeks ago. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Philly Fed Manufacturing Survey Up: The Philadelphia Fed said this morning its gauge of regional business activity rose to 13.9 in July from 1.3 in the prior month. Any reading above zero indicates improving conditions. This is the sixth straight month the index has been above zero. It is the highest reading since the April reading of 15.5, which was a two-year high. The index of future activity jumped to 38.7 in July from 13.8 in the prior month. That’s the highest reading in three years. The Philadelphia Fed index is one of the first regional manufacturing gauges that offer timely reads of the manufacturing sector.

Industrial Production Surges Again: Industrial production rose in June for the second month in row, driven by rising car sales and high demand for air-conditioning during a summer that has seen especially hot weather. Output rose 0.6% last month after an even bigger increase in May, the Federal Reserve said. Capacity utilization rose to 78.8% points from 78.3%, the Fed said, but that left it about a full percentage point short of its historic average. The figure reflects how much of a manufacturing plant is being used to produce things. When business is slow, some capacity is idled to save until demand improves. The industrial side of the economy has been stuck in a rut for a few years and is unlikely to improve much until the Federal Reserve cuts interest rates. High rates have kept car sales in check and depressed business investment.

Housing Starts Increase: Construction of new U.S. homes rose 3% in June as builders scaled up new projects. Housing starts rose to a 1.35 million annual pace from 1.31 million in May, the government said yesterday. That’s how many houses would be built over an entire year if construction took place at the same rate in every month as it did in June. But the pace of construction has been trending at lower levels in recent months as builders grapple with elevated financing costs, as well as 7% mortgage rates that have dampened home-buying activity. New-home construction is down 4.4% from a year ago. Building permits, a sign of future construction, rose 3.4% to a 1.45 million rate. Housing starts are typically a volatile data series. But the data indicates that home builders are scaling up to an extent, particularly in apartment construction, to meet buyer demand.

Business Inventories Increase Slightly: U.S. business inventories increased slightly more than expected in May amid solid rises in stocks at wholesalers and retailers, a trend that could see inventory investment contributing to economic growth in the second quarter. Inventories rose 0.5% after climbing 0.3% in April, the Commerce Department’s Census Bureau said on Tuesday. Economists polled by Reuters had forecast inventories, a key component of gross domestic product, rising 0.4%. Private inventory investment has been a drag on GDP for two straight quarters as businesses carefully managed stocks and domestic demand remained strong. There is cautious optimism that inventory accumulation could offset some of the anticipated hit on GDP from a widening trade deficit.

Import Prices Flat: The U.S. import price index was flat in June, held down by drop in fuel import prices, the Labor Department said Tuesday. Imported fuel prices fell 1% in June after a 0.4% gain in the prior month. This is the first drop in import fuel prices since last December. Lower prices for petroleum and natural gas led the overall decline. Import prices had risen in the first four months of the year, causing some worry about sticky inflation, but have cooled off in the past two months.

Retail Sales Flat, Sign of Economic Stability: Sales at U.S. retailers were flat in June because of falling gas prices and a cyberattack on auto dealers, but most other stores showed an increase in spending in a sign of a stable economy. A raft of recent reports suggest the economy has slowed and that consumers have cut back on spending. Yet there was no sign in the June retail report that these trends have intensified. If autos and gas are stripped out, retail sales actually rose a solid 0.8% last month, seasonally adjusted figures showed. And sales in April were revised higher. Consumer spending has slowed under the weight of lingering inflation and high interest rates, but households are spending enough to keep the economy expanding. What’s more, the Federal Reserve is primed to cut interest rates soon if inflation continues to recede. That could help boost sales of big-ticket items such as new cars and goose the economy.

Fed Chair Powell Speaks: Federal Reserve Chair Jerome Powell on Monday said he would not signal at what meeting the central bank might make the first cut to its benchmark interest rate. Some economists think the Fed might move as soon as this month. Powell said the Fed was taking a “meeting by meeting” approach. For months, the Fed has said it needed greater confidence that inflation was coming down to its 2% target before it would cut rates. Powell said that the last three readings in the second quarter, including last week’s data, “do add somewhat to confidence.” The soft consumer-price index reading last week has raised expectations in the markets that the Fed could be ready to move.

CPI Cooling: Inflation is cooling again after a surprising surge earlier in the year. The cost of consumer goods and services fell in June for the first time since the pandemic in 2020, affirming a recent slowdown in inflation that could impel the Federal Reserve to cut high U.S. interest rates in the next few months The first decline in the consumer price index since the pandemic in 2020 could even speed up the Fed’s decision. The CPI has risen at a 3.0% clip in the past 12 months. Still, the 3% yearly reading was the lowest since April 2021.

Consumer Credit Picks Up: Total consumer credit rose $11.3 billion in May, up from a $6.5 billion gain in the prior month, the Federal Reserve said last Monday. The rise in May translates into a 2.7% annual rate, stronger than the 1.5% rise in the prior month. Economists are watching the U.S. consumer closely for signs of moderation in spending, which is a key engine of growth in the economy. The drop last month was seen as a sign that consumers were pulling back from spending.

Fed’s Beige Book Shows Economic Activity Softening: U.S. economic activity seemed to soften in the past two months, with five of the Federal Reserve’s 12 regions reporting flat or declining activity, a Fed survey released yesterday found. That is three more weak districts than were reported in the last survey, in May. The Fed’s Beige Book survey found that housing spending was little changed, with consumers turning frugal. Prices and wages increased at a modest pace overall, the Fed said. The current Beige Book, a collection of anecdotes from the Fed’s business contacts, covers the six weeks leading up to July 8. It was prepared ahead of the Fed’s next meeting, which is set for July 30-31. But the survey was downbeat about the next six months. Business contacts are expecting weaker activity due to a wall of worries including uncertainty around the upcoming presidential election, domestic policy, geopolitical conflict and inflation.

Home Builder Confidence Continues Decline: Builder confidence fell for the third month in a row in July as elevated mortgage rates dampen home-buying activity. Sentiment among builders is at the lowest level since December 2023. Pessimism over the direction of sales of new homes pushed the National Association of Home Builders’ monthly confidence index down to 42 points in July, the industry group said on Tuesday. A year ago, the index stood at 56. Builders continue to ramp up incentives and cut prices to keep buyers interested as mortgage rates stay near 7%. The homebuilding industry is feeling the toll of higher interest rates, and builders are cutting prices and offering incentives to keep buyers interested.

Empire State Manufacturing Survey Contracts Again: The New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, slipped 0.6 points in July to negative 6.6, the regional Fed bank said Monday. Any reading below zero indicates deteriorating conditions. This is the eighth straight month of contraction in the New York factory index. Labor market conditions remained weak. Prices for inputs continued to advance while selling price gains were minor. The Empire State index has been weaker than the national measures this year, dropping deeply into negative territory before recovering closer to a neutral reading.

Consumer Sentiment Hits 8 Month Low: Consumers’ optimism about the economy fell to an eight-month low in July over frustration with high prices, even though they expect inflation to slow over the next year. The first reading of the consumer sentiment index in July dropped to 66.0 in July from 68.2 in June. It was the fourth decline in a row and the weakest reading since November. The index also stands well below a pre-pandemic reading of 101 from February 2020.

PPI Rises Faster Than Expected: Wholesale costs rose slightly faster than expected in June, but not enough to counter a recent string of reports showing inflation has slowed again. The producer price index advanced 0.2% last month, the government said last Friday. That was a touch faster than Wall Street’s 0.1% forecast. The Fed is aiming to reduce the annual rate of inflation to 2% using its preferred PCE index. The increase in wholesale prices in the past 12 months, meanwhile, edged up to 2.6% in June from 2.4% in the prior month. The 12-month increase in the core wholesale prices, which omit the volatile food, energy and trade margin categories, decelerated to 3.1% from 3.3%.

U.S. Budget Deficit Near $1.3 Trillion So Far This Year: The federal budget deficit was $1.26 trillion in the first nine months of the fiscal year, the Treasury Department reported last Thursday — a 9% drop compared with the year-ago period. The year-to-date figure includes a monthly deficit for June of $66 billion — a figure that would have been more than twice as large if not for calendar-related quirks in the timing of payments. The government’s fiscal year runs from October through September. For the year to date, revenues are 10% higher than during the same period in fiscal year 2023, while spending is 5% higher. Spending on interest for the public debt is up 33% in the first nine months of the year. Deficit hawks have warned that rising borrowing costs will crowd out opportunities for investing in other areas and pose challenges to the country’s fiscal future. This year’s deficit is on track to top last year’s, according to recent projections from the CBO. The agency estimates that the fiscal 2024 shortfall will be $1.9 trillion, topping the 2023 deficit of $1.7 trillion.

NFIB Optimism Index Still Underwater: The NFIB Small Business Optimism Index reached the highest reading of the year in June at 91.5, a one-point increase from last month. The last time the index was higher was in December of 2023 when it reached 91.9. Even so, this marks the 30th month below the historical average of 98. Inflation is still the top small business issue, with 21% of owners reporting it as their single most important problem in operating their business, down one point from May.

Call me if you have any questions. I am always happy to help!

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.