The Year So Far

08/27/2024|Tumwater Wealth Management|

It is a real pleasure to report to you on the progress of the portfolio – and even more important, of our financial plan – so far in 2024.  As we usually do in these updates, we want to remind ourselves of a handful of timeless truths about successful long-term wealth management.  Then we’ll jump to some more current observations.

Our General Principles

  • We are goal-focused, plan-driven, long-term investors in businesses (stocks).  Our portfolios are based on and driven by your most important lifetime financial goals, not from any guesses or forecasts about the economy or the markets.
  • We believe the economy cannot be consistently forecast and the markets cannot be consistently timed.  We believe there is not only no advantage to going in and out of markets, but that it is actively detrimental to your wealth in the long run, regardless of whatever happens to be going on in the markets at the moment.
  • We therefore believe the most effective way to capture the full long-term return that stocks have delivered historically is to remain fully invested all the time.
  • We are therefore prepared to ride out the stock market’s frequent, often significant, but historically always temporary, declines. 
  • We believe the best way to be prepared for these inevitable, but unpredictable, downturns, is to always keep any money we intend to spend from the portfolio in the next five years out of stocks and invested in something stable and liquid instead.
  • We believe that even during difficult markets, dividends that we collect and reinvest from our stock investments will buy us more, lower-priced shares – and that the power of compounding will continue, to our long-term benefit.

Current Commentary

  • The year so far can be simply but accurately summed up in two observations:
    • The US economy has continued to grow, however modestly.
    • The stock market – due to accelerating growth in corporate profits and dividend increases – has done very well.
  • Economic growth has remained slightly positive, and we have continued to avoid a recession. 
  • Inflation continues to slow very gradually but is still well above the Federal Reserve’s target of two percent. 
  • The expectation is that rate cuts will begin in September.  We will all need to hope that doesn’t push inflation higher.  Inflation is cancer to an economy and a currency, and the Fed needs to do whatever it takes to kill it.
  • Even without rate cuts so far this year, the stock market has advanced solidly, driven by large growth companies, primarily the technology sector.  All three major stock indexes are significantly into new high ground.  What’s driving this is just what it fundamentally ought to be: higher profits and rising dividends.  Bloomberg’s current estimates are for the S&P 500’s earnings to be up something like 8.8% this year, to be followed by a further 13.6% increase in 2025.
  • Even though cash dividend payments to shareholders are at record high levels, S&P 500 companies are still paying out less of their profits than they have historically (about 37% lately versus the average for the last 30 years of nearly 46%).  Between that and sharply increasing profits, there seems to still be quite a bit of room for further dividend growth this year and next.
  • Profits and dividends are what ultimately drive the long-term value of our core investment asset: ownership in a broadly diversified portfolio of enduringly successful companies.  Not the national debt; not the looming election; not the presence or absence of Fed rate cuts; not war(s); not the onset of the next regularly scheduled government shutdown “crisis.”
  • I continue to believe that the more we focus on the fundamental strengths of our core asset, the more we’re able to tune out the noise, and the less danger we will be in of emotional overreaction to gyrations in “the stock market.”
  • I believe in our plan, and I love what we own.

Thank you, as always, for being my clients.  It is a privilege to serve you.