Financial Feature – Money Flows

Submitted and Written by IVCBA Member, David Vomund

An old chestnut among investment advisers is that one should save like a pessimist and invest like an optimist.  Pessimists would have more cash today and short-term bonds.  Optimists always like stocks and on occasion bonds.  They like bonds now.    

First, the stock market.  Stocks have been strong, maybe too strong.  This year through last Friday the S&P 500 was up 7.4 percent without even a two-percent pullback.  That’s unsustainable.

Even in the really good years, one should expect a correction (a pullback of 10 percent or more) sometime along the way.  Since 1928, the S&P 500 has finished the year up 10 percent or more 55 times. In 23 of those 55 years there was a correction.  Using the same time frame, the stock market had yearly gains of 20 percent or more on 34 occasions.  Of those 34 years there was a correction sometime during the year about half the time.  Bottom line:  even in the best years investors should expect double-digit percentage pullbacks.  This year should be no different.

Now to bonds and preferred stocks.  Very quietly bonds and preferreds are rallying.  Last Friday the iShares Preferred and Income Securities ETF (PFF), which yields 6.5 percent, reached a one-year high.  It is up 4.5 percent in 2024 excluding dividends.  Why the rally?  Investors have been locking in attractive yields knowing that the rate hike cycle has ended and rates will be cut.  

Warren Buffett once wrote, “if you wait for the robins, spring will be over.”  Translation:  Successful investors anticipate tomorrow’s headlines.  Today, people are happy to receive five percent in risk-free money market funds.  But most expect the Fed to begin lowering rates in the June and again in the second half.  Will investors still be comfortable when money market yields fall to 4.75 percent?  How about 4.5 percent?  That’s why money is moving into stocks and bonds.  Those who wait will pay a higher price for stocks and bonds.

Money has to go somewhere and the best asset class — stocks — will continue to attract its share.  That alone is reason to expect higher prices ahead for the market.  But there are stocks and there are stocks.  The big-cap tech stocks, until recently the leaders, are vulnerable due to their valuations and investor over-optimism.  That’s why the S&P 400 Mid-Cap ETF (MDY) and iShares Russell 2000 (IWM) have begun to outperform.  The broader market is finally participating.  That’s a good sign.  

David Vomund is an Incline Village-based Independent Investment Advisor.  Information is found at www.VomundInvestments.com or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.