On It with Offit - October 2023

*|MC_PREVIEW_TEXT|*

OCT | 2023 Offit Advisors Brings Clients & Friends Together for Fall Outing Check out Ben's speech from this year's Fall Outing, with a few very special little guests, and a fun and interactive team panel.  OA's Laura Sendldofer & Rachel Burk Participate in UMGC's Financial Wellness Day Laura Sendldorfer and Rachel Burk provided pro bono virtual financial planning for people who traditionally don’t work with a financial advisor through UMGC Financial Wellness Day. This is always a meaningful and valuable experience for our advisors to use their knowledge skills and talents and give back.   Ben Offit Named One of the Country's Top Financial Advisors for 2023 Ben was recently named one of the Top Financial Advisors in America by Five Star Wealth Manager, recognized for excellence in his field. Surge pricing isn’t just for Ubers and Airfare anymore. The rise of algorithms and AI has introduced the concept across a growing number of businesses. For example, “Amazon changes the price of its products on average every 10 minutes,” and Walmart has begun installing “electronic shelf labels” that allow its brick-and-mortar store to “rapidly update prices.” The Week, October 1, 2023 Despite rising interest rates, Americans spent 5.8% more in August than a year earlier. About 64% of households made at least one large purchase in the previous four months, the highest reading since 2015. The Wall Street Journal, October 1, 2023   Individual taxpayers, businesses, and corporations collectively owed $688 billion in unpaid taxes for the returns due last year. According to the IRS, those are the projections about the gap between taxes owed and taxes actually paid. NPR, October 13, 2023   October 9, 2023 According to data from the Federal Reserve, since 1962, the average daily 10-year Treasury yield was more than a point higher than now- 5.9%. Barron’s. October 3, 2023 The missiles that comprise the land component of America’s nuclear triad are scattered across thousands of square miles of prairie and farmland, mainly in North Dakota, Montana, and Wyoming. About 150 of the roughly 400 Minuteman III intercontinental ballistic missiles are currently on alert, and it would take an ICBM about 25 minutes to reach Moscow. The Atlantic, September 2023   “Everybody is born 100% ego; after that, it’s just adjustment.” Agnes Martin Staying Sane in the World of Finance; Don't Chase Investment Fads, Focus on What Works In today's edition, we're diving headfirst into the lovely world of investment fads. So, grab your popcorn, and try not to spill it as we enjoy this up-and-down financial journey!   Investment Fads: The Chase for Success Imagine you are at a neighbor's BBQ in Maple Lawn, while you overhear a neighbor starting to brag about how much money they have made in XYZ investment. Sound familiar? Well, let’s talk about how some of those work and ones to be aware of. Fad 1: Chasing Past Performance in Funds There is something within investing called the Behavior Gap. This is illustrated by a third-party research institution called Dalbar, which does a study each year of how ‘regular investors’ performance is compared to the market. And what they find each year is that the ‘regular investor’ underperforms the market by about half of what it does. This is because most people chase what seems to be hot at the moment, and they shy away from what seems to be underperforming at the moment. This can be seen in funds like ARKK which did really well at its onset and then significantly underperformed after it amassed a lot of new investors and capital. These investors were chasing the past performance of what it did, not what it was going to do in the future. A similar example could be investors chasing things like Cryptocurrency, NFTs, Cannabis stocks, AI stocks, Vaccine stocks, etc. It seems logical to invest in something that seems to have so much relevance and importance in the moment, but that is not necessarily a predictor of what it will do in the future.   Fad 2: Chasing Short-Term Interest Rates With interest rates being higher, people are saying to themselves why should I invest or “take risk” in the stock market when I get “Treasury bills and chill” and earn 5.6%? These are the highest yields we have seen since 2001, and while they may feel comfortable and cozy in the short term, in the long term it can end up costing you a lot of money. If you look back at January 2001, when we were near a recession, and then look out over the next 20-year period – cash did 31%, treasury bonds did 163%, and the S&P 500 did 318%. So ultimately, while it felt good in January 2001, or may feel good now, in the long term you are costing yourself money with lesser long-term returns just by staying invested through the volatility. In addition, after taxes, Treasury bills earn closer to 3.9% right now. These yields aren’t permanent, but staying invested and capturing long-term returns are.   Fad 3: Chasing the Top Tech Companies People are also focusing on that most of the returns are being driven in 2023 by the ‘Magnificent 7’ the top 7 (tech stocks) in the S&P 500 (Apple, Meta, Tesla, Nvidia, Amazon, Alphabet, Microsoft). The fact is that while these companies are doing great right now and are “hot”, the top companies change all of the time. If you look back to previous decades, the top companies were things like General Electric, IBM, Exxon, etc and these were before things like the top companies today were even conceived of. Another example is think about Blockbuster. Who could have imagined that consumers would stop going to a physical store and picking out VCR tapes? Then out of nowhere came Netflix. Now Netflix faces competition from Hulu, Disney Plus, Amazon Prime, etc and who knows if it will be around in 10 or 20 years. This type of thing happens all of the time. So if chasing performance and fads is a mistake, what should most investors do?   Not a Fad: Focus on the Fundamentals If you want a good blueberry pie, focus on the ingredients. Focus on finding high-quality blueberries, high-quality butter, and high-quality ingredients to make the dough, and follow a recipe that has worked many many times over to deliver a good pie. The same is true for investing:   1) Focus on your asset allocation – your ratio of stocks to bonds and what makes sense for your long-term financial plan 2) Focus on how it should be diversified (US vs International, Growth vs Value, Large vs Small Cap, etc.) 3) Focus on becoming invested in a low-cost way with index funds that don’t cost very much 4) Focus on investing in funds that have tax efficiency and don’t inherently create a lot of capital gains and taxes to pay 5) Focus on staying invested for a decade or more, despite the ups and downs along the way All of this will help you get out of the “in-and-out” philosophy. Instead of focusing on who did best recently, focus on the ingredients that lead to success. Don’t chase the hot short-term fads, focus on what works in the long term. Stocks Slip Further in September as Yields Rise to Highest Levels in Years HIGHLIGHTS   Stock market weakness from August continued in September and the S&P 500 Index recorded its first negative quarter of 2023.   The VIX Index, a measure of stock market volatility, closed September at 17.52. Reflecting higher volatility during the month, the VIX Index approached 20 for the first time since May.   The FOMC left the Fed Funds rate unchanged in September, but bond yields rose to their highest level in years during the month. In what has been a rather steady move higher since May, the 10-year U.S. Treasury yield closed the month at 4.59% after closing at 4.61% just a few days earlier. The market has not seen yields this high since prior to the credit crisis in 2007. The increase in yields put pressure on bond returns in September and pushed some areas of the bond market into negative year-to-date territory. The economy remains strong, but signs of modest slowing seem to be developing on the job front. Payroll additions and job openings have declined in recent months as companies appear more cautious in hiring at this point in the cycle. On a positive note, corporate earnings are improving and earnings are expected to grow in calendar year 2023 and 2024. EQUITY MARKETS The strong early summer for stocks gave way to late-summer weakness and a fall that has started on a soft note as well. Declines in September were broad, with value stocks holding up only modestly better than growth stocks and large-caps holding up only modestly better than small-caps. However, declines were experienced across the board. International stocks declined less than U.S. stocks. See Table 1 for equity results for September, Q3 and year to date. Table 1 Index Sep 2023 Q3 YTD S&P 500 -4.77%  -3.27% 13.07% S&P 500 Equal Weight.           -5.08%             -4.90%. 1.79% DJIA -3.42% -2.10%       2.73% Russell 3000 -4.76% -3.25% 12.39% NASDAQ Comp. -5.77% -3.94% 27.11% Russell 2000 -5.89% -5.13% 2.54% MSCI ACWI ex U.S. -3.16% -3.77% 5.34% MSCI Emerging Mkts Net -2.62% -2.93% 1.82% Source: Bloomberg For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. As the table shows, declines in September drove quarterly results into negative territory for most of these equity indices. Comparing and contrasting the S&P 500 Index with its equal-weighted counterpart provides important insight into this market. Driven by the strong performance of large-cap and mega-cap Technology companies, the S&P 500 Index shows a solid year-to-date gain of over 13%. However, the equal-weighted S&P 500 Index (which can be thought of as representing what the average stock is doing) reflects a much more modest gain of less than 2% so far this year. Simply said, the largest cap Technology companies, which have a larger weighting in the S&P 500 Index, have been the primary drivers of the market in 2023. Meanwhile, the average stock has exhibited only modest returns. Further to that point, small-caps, as measured by the Russell 2000 Index, have gained only 2.54% so far this year and growth has dominated value. The Russell 1000 Growth Index has advanced 24.98% while its value counterpart has gained only 1.79% year to date. Large-cap growth stocks, and in particular, those in the Technology sector, have dominated results this year after struggling in 2022. Broad international equities outperformed U.S. markets in September, but the U.S. has seen stronger results year to date. The MSCI ACWI ex. U.S. Index was down -3.16% in September and the MSCI Emerging Market Index fell -2.62%. We still see opportunities in international markets with valuations that are significantly lower than the U.S. and our expectation that the U.S. dollar will largely weaken over the short to intermediate term. However, so far this year, U.S. stocks have outperformed international stocks. Fixed Income   As rates continued to rise, bond returns struggled for the month and quarter. Declines during the quarter pushed several of the bond indices into negative year-to-date territory with the exception of high yield. The 10-year U.S. Treasury yield has been trending upwards since late spring. Over the third quarter, the yield closed July at 3.97%, August at 4.09% and September at 4.59%. It was a tough quarter for bonds indeed with an acceleration of declines in September. Rates have been volatile in 2023, but the trend has clearly been higher in recent months. See Table 2 for fixed income index returns for September, Q3 and year to date.   Table 2 Index Sep 2023       Q3 YTD Bloomberg U.S. Agg -2.54%  -3.23% -1.21% Bloomberg U.S. Credit -2.60% -3.01% 0.03% Bloomberg U.S. High Yld -1.18% 0.46% 5.86% Bloomberg Muni -2.93% -3.95% -1.38% Bloomberg 30-year U.S. TSY.          -7.60% -12.72%.           -9.68% Bloomberg U.S. TSY -2.21% -3.06% -1.52% Source: Bloomberg For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.   We believe that the recent move higher in rates has presented bond investors with opportunities to invest at even higher yields and coupons than seen earlier this year. We certainly acknowledge that the accompanying near-term decline in bond prices has been a challenge. However, we believe that higher yields in bond portfolios could benefit clients over the longer term. We expect the 10-year U.S. Treasury yield to move lower as we go through 2023 and into 2024, but we also anticipate volatility along the way. The more interest rate sensitive pockets of the bond market (like U.S. Treasuries) have been the hardest hit with this recent move higher in rates. Less interest rate sensitive high-yield bonds have been the clear winner so far in 2023, which is not that surprising on the heels of such solid stock market gains as well. We maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment. We also believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed. Furthermore, we believe that bond yields are attractive in what are some of the highest yields we have seen in the last 15 years. S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index. Dow Jones Industrial Average - The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.  NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. Today the NASDAQ Composite includes approximately 5,000 stocks, more than most other stock market indices. Because it is so broad-based, the Composite is one of the most widely followed and quoted major market indices. Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index which includes the 3,000 largest companies in the U.S., based on market capitalization. As of the latest reconstitution, the average market capitalization was approximately $762.8 million; the median market capitalization was approximately $613.5 million. The largest company in the index had an approximate market capitalization of $2.0 billion and a smallest of 218.4 million.  Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.  Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.  Government bonds are guaranteed by the U. S. Government and, if held to maturity, offer a fixed rate of return and fixed principal value. Securities offered through Kestra Investment Services, LLC (Kestra IS), Member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Offit Advisors is not affiliated with Kestra IS or Kestra AS. Offit Advisory Services, LLC is a tax firm but neither Kestra IS nor Kestra AS provide legal or tax advice and are not Certified Public Accounting firms.For more information on the Five Star Wealth Manager and the research/selection methodology go to: www.fivestarprofessional.com. Investor Disclosures: https://bit.ly/KF-Disclosures 6990 Columbia Gateway Drive Suite 150 Columbia, MD 21046, US Phone + Fax:  410 600 PLAN (7526) E – Office@OffitAdvisors.com W- www.OffitAdvisors.com   To schedule an appointment with us, click here! The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Want to change how you receive these emails? You can update your preferences or unsubscribe from this list.