As you know, we entered 2024 with a strong market and the expectation of several interest rate cuts by the Fed. However, the economy is still growing, and the data is not what is typically expected. While job growth continues to exceed economist expectations, unemployment has risen to 3.9%, and inflation, though recently ticking down slightly, is also on the rise. This conflicting data has led the Fed to pause any changes to interest rates, with potential rate declines now being considered for later this year or next. There is ongoing discussion about rolling recessions and rolling recoveries.²

International stocks have generally outperformed domestic stocks, but this is masked by the 30% concentration in the Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla). While their growth boosted the overall S&P last year, these stocks also played a significant role in the 2022 bear market. AI has contributed to this overperformance, making it challenging to keep our portfolios balanced amid mega-cap stock domination.

Value stocks constitute a significant portion of our stock portfolios. Despite underperforming compared to growth stocks, many of the Magnificent Seven stocks are nearing overvaluation, with the average tech stock trading at 30 times earnings.¹ This makes value stocks relatively more attractive moving forward. While there may be increased vulnerability in overweighting growth stocks, maintaining some exposure to them is essential.

As we await clearer Fed policies, it is an opportune time to review our diversified investment approach. Our portfolios are primarily based on the process of Dimensional Fund Advisors, drawing on the research of Eugene Fama and Kenneth French. Their studies indicate that undervalued and smaller companies have historically outperformed the market. We integrate this approach with modern portfolio theory, which diversifies risk by investing across various industries, asset classes, markets, and risk levels. This theory assumes that investors will seek to maximize expected returns with a preference for lower-risk portfolios. Historically, this strategy has weathered many market conditions, and I believe we are well-positioned to continue this trend.³,⁴

Balancing your risk/return tradeoff is crucial for weathering future business cycles. While our diversified investment philosophy may sacrifice some upside in rising markets, I believe this tradeoff is valuable in helping clients meet their needs. Please inform us of any changes in your situation so we can adjust your portfolio to align with your goals and objectives.

1- Current Perspectives on the Economy and Markets
2- 2024 Market Outlook: Widening the Lens | Charles Schwab
3- file:///C:/Users/jan.kowal/Downloads/client-ready_go-beyond-indexing-with-dimensional-etfs.pdf
4- What is the Modern Portfolio Theory
Jan’s passion for helping clients work towards their financial goals began almost 40 years ago. His planning is based on personal relationships and a true understanding of clients and their goals. Jan graduated from George Washington University with a BBA in Accounting and an MBA in Finance and Investments. He has been a Certified Financial Planner since 1984. Jan enjoys music, travel, cooking, and family time.

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