BRAVE Letter – Q3 2024

Dear Clients and Friends,

 

Both stock and bond markets are on pace for an excellent year with the S&P 500 up almost 20% and the U.S. bond market returning over 5% so far. The continued rally in stocks has driven valuation extremes even further while traditional recession indicators appear to have ceased working. This has caused many observers to wonder whether “this time is different” …the four most infamous words in investing. In this letter we share an update on BRAVE, recent clarification on required distributions from inherited IRAs, our current view on the markets, how we are implementing that view in managing our client portfolios, and a few administrative items.

 

BRAVE Family Advisors Update

 

BRAVE has continued to experience solid growth this year through both new clients joining the firm and existing clients growing their relationship with us. We are working on refreshing our website which should be finished by yearend. Anthony “Tony” Morrison, a senior at Montana State University majoring in Business Management and Economics, did a second summer internship with the firm and spent some of his time exploring how we might use artificial intelligence to improve our efficiency and client service.

 

Jamie’s role at the firm has been evolving. When he joined BRAVE in April 2019 his primary focus was on “institutionalizing” our internal functions. Up until then the actual business of running the company had been shared by Brett, Dave, and Suzie. Over the ensuing few years Jamie became the Chief Operating Officer, Chief Financial Officer, and Chief Compliance Officer and has brought both structure and efficiency to the activities within those roles. Now that that has been accomplished and he does not need to spend all of his time on those areas, he has also been increasingly focused on developing new business and working with existing clients including accompanying Scott on client visits.

 

Clarification on Inherited IRAs

 

The Internal Revenue Service (IRS) finally issued clarification last month on the law that was passed in 2019 which changed the treatment of inherited IRAs for most heirs. The new law eliminated the ability to “stretch” an inherited IRA over the heir’s expected lifetime and instead required it to be fully distributed within ten years of the owner’s death. This applied to most heirs other than spouses. However, no specifics were included as to whether distributions were required annually or whether the entire balance could be withdrawn in the tenth year. The IRS clarified that for non-spouse inheritors of IRAs that were owned by someone already taking required minimum distributions (RMDs) (over the age of 73 under the current law) they must take a minimum annual distribution until the account is drained. If the IRA was owned by someone not yet required to take RMDs, then the inheritor can wait to take the account balance out in the tenth year. Given the lack of clarity in the law up until now, the IRS has waived penalties on not taking an RMD from an inherited IRA through 2024. However, this does not affect the ten-year deadline which is still measured from the owners date of death. For ROTH IRAs, they must be drained by the ten-year anniversary, but there is no annual distribution requirement.

 

Market Thoughts: This Time is Not Different

 

We find ourselves often wondering of late whether those most dangerous four words in investing, “this time is different”, are actually appropriate to describe the current environment.

 

The story of the U.S. stock market is largely the same as it has been for much of the last several years: overall valuations are high; growth stocks are highly valued relative to value stocks; and large capitalization stocks are outperforming those of small companies. At the same time, the U.S. stock market continues to be valued much more richly than non-U.S. markets. For a while these conditions could be attributed to record low interest rates, but after short-term rates increased 500 basis points and the bull market in stock indices continued to roll along that argument obviously no longer has validity.

 

The CAPE (Cyclically Adjusted Price Earnings) Ratio has recovered to 35 which is closing in on the high reached prior to the correction experienced in 2022 (Chart 1). The ratio of U.S. market capitalization to GDP (Warren Buffet’s favorite valuation indicator) is also approaching the 50+ year peak of three years ago (Chart 2). Large capitalization stocks are more richly valued than those of small companies since 2000 (Chart 3). Growth stocks have blown through their relative valuation peaks compared to value stocks seen in 2020 and 2022 (Chart 4). Similarly, U.S. stocks are setting new modern valuation extremes relative to non-U.S. stocks (Chart 5).

 

Not only have stocks seemed to defy valuation norms, but typically reliable economic indicators have also been behaving differently this cycle. The index of Leading Economic Indicators has been declining for 29 months (Chart 6) and the yield curve had been inverted (short-term rates higher than long-term rates) for 25 months prior to recently dis-inverting basis the 2-year/10-year Treasury curve (Chart 7). Historically that type of behavior by these indicators has been a reliable harbinger of a coming recession, but not this time…at least so far.

 

Bonds continue to appear to offer compelling value relative to stocks. The yield on the 10-year Treasury note is at the widest premium to the dividend yield on the S&P 500 index in almost twenty years (Chart 8). The 10-year yield is also approximately in-line with the earnings yield (the inverse of the price earnings ratio) on the S&P 500 for the first time in almost twenty-five years (Chart 9). As mentioned above, this is happening at a time when the risk of a recession seems to be high based on some historically reliable indicators. A continued economic slowdown should be positive for bonds as inflation would likely continue slowing while being negative for stocks as corporate earnings would come under pressure. Further the level of uncertainty on both the domestic political and global geopolitical fronts seems higher than normal.

 

Our conclusion is that this time may be different in terms of the durability of high valuations and the short-term behavior of economic indicators, but valuation realities and economic laws have not been permanently repealed and ultimately both of those will eventually revert to “normal”. There is an old saying, “Markets can stay irrational longer than one can remain solvent”. We fully expect that with the Federal Reserve now set to continue lowering short-term rates in the coming months that current valuation extremes in certain areas of markets will likely reach new heights before any meaningful correction.

 

We do not make outsized bets for or against a market regardless of how undervalued or overvalued we view it to be; however, we do view our role as adding risk when markets look cheap and reducing risk when markets look expensive. We believe this is one of those times as large capitalization U.S. growth stock appear very overvalued and long-term U.S. Treasury bonds look attractive. That could work against relative performance for a period of time, but we believe that it is more important to protect clients from outsized risks than to try to chase every bit of late-cycle performance.

 

We believe that it is also important to note that despite the apparent extremes in their valuation, U.S. stocks should still offer positive returns based on history as the current level of the CAPE ratio has seen annual average returns of -1% to +5% (Chart 10).

 

Chart 1: Long-term Historical Cyclically Adjusted PE Ratio with Recessions

 

Chart 2: Wilshire 5000 Total Market Capitalization to US GDP

 

Chart 3: U.S. Large Cap versus Small Cap 

 

Chart 4: Russell 1000 Growth Index vs. Russell 1000 Value Index 

 

Chart 5: U.S. Stocks versus European Stocks

 

Chart 6: Index of Leading Economic Indicators

 

Chart 7: 10-Year Treasury Minus 2-Year Treasury

 

Chart 8: S&P 500 Index Dividend Yield Versus 10-Year Treasury Note Yield

 

Chart 9: S&P 500 Earnings Yield Versus 10-Year Treasury Note Yield

 

Chart 10: Next 10 Year Annualized Returns of S&P 500 (Vertical Axis) vs. Beginning CAPE Ratio (Horizontal Axis)

 

Chart 11: U.S. Dollar Index

 

Portfolio Management

 

We have made some changes to most client equity portfolios in the last month or two. Following our belief that U.S. growth stocks are quite stretched from a valuation basis, we liquidated our holdings of the Invesco QQQ Trust (Ticker: QQQ) which we had purchased almost a year ago on our expectation at that time that moderating inflation and interest rates would favor growth stocks. We also liquidated most of our holdings of Walt Disney Corp. (Ticker: DIS) as we continue to be frustrated by management’s inability to achieve sustained earnings growth relative to the level of capital that has been expended. We have redeployed the proceeds of those sales into the iShares Gold Trust (Ticker: IAU) and the Vanguard FTSE All World ex U.S. ETF (Ticker: VEU). We believe that the likely downward trend in domestic interest rates will remove the major support for the U.S. dollar (Chart 11) which should benefit hard assets priced in dollars, such as gold, and non-U.S. stocks which are at a historical discount from a valuation basis.

 

In our fixed income portfolios, we increased the duration of our holdings a few months ago by swapping a significant holding of a 2027 Treasury note into a 2044 Treasury as we became increasingly convinced that the economy and inflation were going to continue to slow. Portfolio durations are longer than benchmark and quality remains investment grade with the majority being U.S. Treasuries. This should result in outperformance if interest rates continue to decline.

 

Administrative Items

 

Please be sure to always inform us of any changes to mailing addresses, email addresses, or phone numbers. Also, if you have any issues with logging into NetXInvestor or Tamarac, please contact Suzie or Angie. They are happy to help you and can usually get any issues resolved relatively quickly.

 

Suzie and Angie will be working on processing the remaining 2024 required minimum distributions that are not on automatic distribution. If you are planning to make any direct charitable contributions from your IRA distributions this year please let them know ASAP to ensure they get processed well ahead of the end of the year to avoid a penalty.

 

As always, we welcome your comments and questions.  Please don’t hesitate to call, visit, or email at any time.

 

My Experience with an Executive Physical

My Experience with an Executive Physical

 

After my wife, Marion, died in March of last year I wrote two letters updating friends and clients on how my kids and I were doing and how I was thinking about my future (both are available on my firm’s website https://bravefamilyadvisors.com/and on my LinkedIn profile page). One of the things I mentioned in both was getting an executive physical to see where my health genuinely stood to avoid a similar surprise as what had stricken my wife. I continue to get a lot of follow-up interest and questions on that process so decided to write this piece to describe in detail (HIPAA be damned!) what my experience was like, what I learned, and subsequent developments. The exams are not cheap and unfortunately are not covered by health insurance. I paid approximately $7,000 for my exam which is obviously a lot of money, but what is the value of potentially saving one’s own life? I hope that sharing my experience will cause others to go through the same type of examination which could reveal important information about their health situation that could extend their life and/or improve their quality of life.

 

Background

 

Marion and I had both gotten executive physicals in October 2006 at Princeton Longevity Center (PLC) https://princetonlongevitycenter.com/ in New Jersey (there are many companies that perform these kinds of tests and I am not endorsing PLC). Probably the most notable finding from that experience was that we both had calcium scores of zero meaning that neither one of us had any detectable plaque in our arterial systems. We had discussed multiple times in recent years scheduling follow-up exams to get updated readings on our health. During the holiday season of 2022, we vowed to stop procrastinating and get them done in 2023. Sadly, we did not get those appointments made prior to March 11, the day that she was stricken by cardiac arrest which led to her death eight days later.

 

The cardiologist who conducted the procedure to stent her right coronary artery after her heart attack informed me that the artery was 100% blocked and that she had multiple blockages in other arteries. While sitting in the waiting room of the Intensive Care Unit still digesting the shock of what had happened, one of my first thoughts was that her death was completely detectable and treatable had she gotten the correct diagnostic examination prior to that fateful day. One of my other thoughts was, “In what condition are my arteries if she and I had lived together and ate most meals together in the intervening 16 ½ years since our zero calcium scores if she was now full of plaque?”. If anything, she ate a healthier diet than me.

 

The only prescription drug that I was on at that time was a daily dose of 50 milligrams of Losartan to help control my blood pressure. I had a history of mild hypertension going back to my late teens. Both of my parents, who were otherwise healthy had needed medication after a certain point in their lives to treat high blood pressure. For a number of years I could control mine through diet and exercise, but had finally agreed to start taking the medication a few years earlier when I was no longer able to naturally keep it consistently below 130/90.

 

The day after Marion died, I went online and booked an appointment for an executive physical at PLC for April 18. I was nervous the four weeks leading up to the appointment as I wondered what the exam was going to reveal about my arteries as well as any other issues that might have developed in those intervening years that had not been detected by my annual physical examinations. I attempted to calm myself by telling myself that it was better to know there was an issue and attempt to treat it than to not know particularly given that I was now a single parent of three twenty-somethings.

 

The Exam

 

The exam was in Shelton, CT, just outside of New Haven and I was instructed to fast after midnight the night before and to report at 7:30am wearing workout clothes and expect to be there for 6-8 hours. The facility was quite modern with six staff members and managed by a doctor. They schedule a maximum of three patients per day, but I was the only patient that day. Upon arrival I was shown to a locker/bathroom/shower area to store my belongings.

 

After completing some paperwork, I was taken to the phlebotomist to have my vitals measured and my blood drawn. My blood pressure was quite high with the systolic reading in the 150s which had been typical since Marion had passed. The next test was a Dexa scan which is purported to be the gold standard in body composition and bone density measurement. One lies on a table while a scanner moves over various areas of the body using low dose X-ray beams to measure bones and soft tissues. From there I was given a standard stress test on a tread mill while connected to numerous electrodes across my upper body. The gradual increase in incline and speed of the treadmill intensifies the exertion required while blood pressure, heart rate, and respiration are continually measured. A light breakfast followed at which I also ordered my lunch from a menu of healthy choices at a nearby Italian restaurant.

 

I was then taken by golf cart to a neighboring building where I was given a computerized tomography (CT) imaging scan of my upper body. One lies down on a table which moves your body into a doughnut-shaped imaging machine. The machine takes X-ray pictures of the torso which are then combined by computer into 3-D images of the organs and other tissues and can identify calcification, tumors, and stones. The next procedure was an ultrasound of my carotid arteries. This was an optional test that I added to the standard package because I have known a couple of people who had issues with plaque buildup in their carotids. The procedure was similar to the ultrasound test performed during pregnancy except that the focus was the sides of my neck.

 

I was taken back to PLC’s offices and had vision and hearing tests. These were followed by a 30-minute Zoom call with a nutritionist. It was requested that I provide a seven-day diary of my eating and drinking prior to that day, but I did not do that because I was in the process of changing my diet so felt that it would not have been representative. Instead, I took the opportunity to get the nutritionist’s thoughts on various diets that seem to be in conflict with each other. For example, vegan versus keto or intermittent fasting versus eating multiple small meals throughout the day. Her view was that no diet is perfect, and they all have their advantages and disadvantages. She believed that everyone needs to find a diet that works with their specific metabolism and, most importantly, that they can stick with. My next appointment was with a physiologist who had me perform a series of exercises to measure my strength and flexibility. He prescribed a daily regimen of movements to address the shortcomings that he detected. The last appointment was with the doctor for a full physical examination which was more thorough than the ones I experienced annually with my primary care physician.

 

Having completed all of the testing scheduled for my visit I was escorted to the lounge where my lunch awaited me. The takeout food was excellent, and I had access to Wi-Fi and cable television while I enjoyed it.

 

The Moment of Truth

 

Following lunch, I was taken back to the physician’s office for a review of the day and to discuss any questions I might have. Remarkably, he had already reviewed all of the results from the various tests and had written a thorough report in preparation for our discussion.

 

He began by telling me that the tests had revealed nothing of serious concern which was an immediate relief! There were no tumors or stones detected and my calcium score was below 6, which he explained is a very low score. He showed me 3-D images of my arteries on his computer and a very small spot of plaque. He explained that all our bodies will eventually begin building plaque in our arteries if we live long enough. For some people it begins in their teens and for others it starts in their elder years. The speed at which one accumulates plaque also varies greatly. He advised that I continue working to lose fat and gain muscle as my body composition measurements suggested that despite going from 213 pounds the morning of Marion’s heart attack to 203 pounds the morning of the exam that I still had approximately 20 pounds of fat to lose. My total cholesterol was 211 which was down significantly from my all-time high reading of 290 in September of 2020. In the wake of Marion’s death I had been very diligent about exercising regularly and reducing my intake of red meat and dairy. He explained that in his opinion the level of one’s cholesterol was virtually irrelevant; the critical factor was how our body deals with whatever amount of cholesterol is in our system. He claimed that more people with low cholesterol have heart attacks than people with high cholesterol.

 

I also had a number of questions about what had happened to Marion. She had passed a stress test ten days before her heart attack…how could that be? His response was that a standard stress test doesn’t reveal arterial blockages. According to him she could have potentially passed that stress test the day she had the heart attack. A nuclear stress test which involves the injection of a radioactive tracer into the patient’s blood stream and then using imaging machinery to detect the blood flow through the arteries could have revealed her blockages. I wondered how she could have been in her condition when her parents lived to the ages of 97 and 101 and eight of her nine older siblings were alive and seemingly healthy. He explained that genetics are important, but not totally deterministic. Plus, she had smoked cigarettes much of her life and that is a known cause of plaque buildup as well as increasing the likelihood of a rupture in the plaque which potentially can lead to a complete blockage of a narrowed artery. She had exhibited none of the typical “heart attack symptoms”…no complaints of pain in her chest or arm or jaw. She had suffered from acid reflux for several weeks and for the twelve hours prior to the heart attack had been vomiting, which she and I had both attributed to food poisoning. He said that symptoms in females often do not present in the “traditional” manner and often are mistaken for digestive issues.

 

Treatment Options

 

In terms of recommendations, the doctor suggested that I do another CT scan in 2-3 years to determine the speed at which my body produces plaque. He recommended doubling the dose of Losartan that I was taking until my blood pressure declined to 110/80 before returning to my original dosage. I asked him about the efficacy of statins which I had always resisted taking despite my high cholesterol levels because of the lack of plaque 16 years earlier. He confirmed that statins do reduce cholesterol levels, but referred back to his belief that the level of cholesterol is not correlated with the incidence of heart attacks. However, he said that he believed that statins definitely had a positive impact on heart attack prevention by preventing plaque becoming brittle which makes it more likely to rupture. This was likely what had caused Marion’s cardiac arrest. He offered that given my plaque level that he would normally be unlikely to prescribe a statin. But considering my stated interest in doing everything I could to extend my life now that was a single parent, he suggested that I take the lowest dose of Lipitor as a preventative measure. I agreed to begin taking 10 milligrams daily.

 

Subsequent Developments

 

Following the exam, I decided to continue working on getting healthier. I am still taking the higher dose of Losartan because my blood pressure remains above the target range despite the medication. I have continued with the daily dose of 10 milligrams of Lipitor. My cholesterol has been tested twice in the last year and both readings were in the 150-160 range with virtually all the reduction being in the low-density lipoprotein (LDL) component, or the “bad cholesterol. I have experienced no side effects from taking the statin. I sometimes wish that I had held off starting it so that I would know how much of this last significant reduction was due to continued lifestyle changes versus the drug. I lost an additional ten pounds in the two months after the exam and have maintained my weight in the 193-196 pound range which is approximately 20 pounds less than I weighed on March 11 of last year. I plan to make a push later this year to get to my “ideal weight” based on the body scan would require the loss of another ten or so pounds.
I will return for another exam in the spring of 2026 to monitor developments.

 

Conclusion

 

The biggest lesson I learned from living through the death of my wife was that we all must take responsibility for our own health care. Our doctor(s) may be competent and well meaning, but they are constrained in their scope and speed of diagnosis and treatment by health insurance companies’ approvals and access to tests and specialist doctors. Had Marion and I taken things into our own hands and scheduled a thoracic CT scan privately rather than waiting for the wheels of our health care system to slowly turn, I am certain that her condition would have been detected, she would have been treated immediately, and she quite likely would have lived another couple of decades.

 

Please let me know if you have any questions or feedback.

 

Scott

BRAVE Letter – Q1 2024

Dear Clients and Friends,

 

Happy 2024!

 

Last year was an excellent year for stocks as the major averages regained most of what they lost in 2022. We are not expecting 2024 to see similar returns as the economy slows and the U.S. market is once again pricey. However, a continued decline in inflation and interest rates will likely provide support to equity and bond prices with growth stocks and non-U.S. stocks poised to do best. In this letter we share an update on BRAVE, some recent changes that affect retirement savings and gifting, our current view on the markets, how we are implementing that view in managing our client portfolios, and a few administrative items.

 

BRAVE Family Advisors Update

 

BRAVE had a strong year of growth in 2023 with another year of record revenues.

 

Later this winter our team will be holding an offsite meeting. We’ll be reviewing the year that was, setting goals for the future, and hearing from at least one outside expert to help us continue to improve the company to serve our clients better.

 

A big “THANK YOU” to those of you who referred family members and friends to BRAVE last year. We continue to be excited to be able to work with additional individuals and families who can benefit from our services.

 

Increased IRS Limits

 

The Internal Revenue Service again increased the 2024 limits on gifting and the annual contribution limits on certain types of retirement savings plans as a result of the recent heightened inflation rate.

 

SECURE ACT 2.0 IMPACTS

 

A new law that contained a package of enhancements to retirement savings, titled SECURE Act 2.0, was signed into law in late 2022. We want to remind you of a few notable changes that may affect you and a modification of one important provision:

  • Raised the age at which RMDs from retirement accounts begin to 73 in 2023 and 75 in 2033. If you turned 73 in 2023 then you need to take a RMD by 4/1/24 for last year.
  • Catch-up contribution limits to 401k plans will be increased beginning in 2025 for workers aged 60-63 from the current $7,500 to $10,000.
  • Up to $35,000 can be rolled over from a 529 plan that has been open for at least 15 years into a ROTH IRA account for the 529 plan beneficiary.
  • The original legislation required that catch-up contributions for workers earning in excess of $145,000 would need to be ROTH contributions beginning in 2024. However, the Internal Revenue Service issued guidance last year that moves the enactment date to 1/1/26 due to difficulties in implementing the change.

 

Market Thoughts: Back to the Future

 

After an excellent year in the U.S. stock market in 2023, it is back to being expensive and some of the areas of recent relative overvaluation have reasserted themselves after correcting in 2022. This is occurring at a time that economic growth seems likely to continue decelerating and geopolitical risks around the world appear higher than typical. Long-term interest rates appear to have peaked as the market is increasingly confident that the Federal Reserve has succeeded in its battle against inflation and that a reversal in its monetary policy stance is inevitable.

 

The S&P 500 Index was up 26.3% last year which brought it back to almost exactly the same level where it ended 2021. During the stock market correction in 2022, valuation in general and some of the areas of extreme overvaluation saw significant corrections. The ratio of growth to value (the way we measure it) experienced a 20% decline; the U.S. stock market relative to non-U.S. stock markets fell about 15%; the U.S. total market capitalization as a % of GDP declined by over 25%; and the CAPE (Cyclically Adjusted Price Earnings) ratio fell from 39 to 27 (Charts 1-4).

 

The recovery last year reversed those healthy corrections to varying degrees. U.S. growth stocks are nearly back to the extreme levels of valuation relative to value stocks seen in 2020 and early 2022. The U.S. market has retraced approximately  75% of its earlier correction relative to non-U.S. stocks. The ratio of U.S. market capitalization to GDP remains well below the peak of two years ago as the result of the high rate of nominal economic growth. However, the valuation level is well above all other times in the last 50+ years other than that seen in the last four years.

 

The current CAPE ratio suggests that U.S. stocks remain priced more richly than at any time in modern history other than the late 1920s, the dot-com bubble, and most of the last seven years. The fact that they are only a bit above the average of the last 25 years obviously raises the question of whether we have entered a new era of “permanently” higher valuations and that “this time is different” …the most dangerous four words in investing. The argument had been that high valuations were justified by low and declining interest rates. Now that those valuations have largely withstood an historic increase in interest rates calls that into question unless a significant further correction in valuation is to come.

 

These relatively rich valuations are occurring at a time of heightened economic, political and geopolitical uncertainty. A significant decline in the index of Leading Economic Indicators has been a virtual fail-safe indicator of a looming recession over the last 65 years. We have experienced a 3+ year decline in that index which would suggest that the current economic slowdown will lead to a recession (Chart 5). This year seems likely to have its share of domestic political volatility with the Presidential election in November. Also, the risks of a broader conflict in the Middle East, uncertainty in Ukraine, and the China/Taiwan situation are all percolating in the background.

 

Chart 1: Russell 1000 Growth Index vs. Russell 1000 Value Index

 

Chart 2: U.S. Stocks versus European Stocks

 

Chart 3: Wilshire 5000 Total Market Capitalization to US Annual GDP

 

Chart 4: Long-term Historical Cyclically Adjusted PE Ratio with Recessions

 

Chart 5: Index of Leading Economic Indicators

 

Bonds on the other hand appear to offer value relative to stocks after their significant declines last year. The yield on the 10-year Treasury note is at the widest premium to the dividend yield on the S&P 500 index in almost twenty years (Chart 6). The 10-year yield is also approximately in-line with the earnings yield (the inverse of the price earnings ratio) on the S&P 500 for the first time in almost twenty-five years (Chart 7). As mentioned above, this is happening at a time when the risk of a recession seems to be high based on some historically reliable indicators. An economic slowdown should be positive for bonds as inflation would likely continue slowing while being negative for stocks as corporate earnings would come under pressure.

 

Chart 6: S&P 500 Index Dividend Yield Versus 10-Year Treasury Note Yield

 

Chart 7: S&P 500 Earnings Yield Versus 10-Year Treasury Note Yield

 

We remain of the belief that the continued high valuation of U.S. stocks doesn’t necessarily mean that disaster for stock returns lies ahead; however, it does suggest that future equity returns are likely to be below historical averages. There is a strong correlation between current valuation levels and future returns. Typically, the cheaper stocks are, the higher future returns will be and vice versa. This relationship can be seen in Chart 8 which illustrates the relationship between the beginning CAPE ratio and stock market returns over the next 10 years. A beginning CAPE ratio of around the current level of 31 has yielded 10-year future annual average returns in a range of -4% to +9% over the last 95 years with most being in the +3% to +5% range. This combined with the likelihood of positive returns from the bond market suggests that balanced portfolios have a good chance of seeing positive intermediate- to long-term returns.

 

Chart 8: Next 10 Year Annualized Returns of S&P 500 (Vertical Axis) vs. Beginning CAPE Ratio (Horizontal Axis)

 

Portfolio Management

 

We made some changes to most client equity portfolios in the fourth quarter of last year to reflect our thinking that economic growth will likely continue to slow and interest rates will generally decline with that trend. U.S. stock markets are definitely expensive, but they have been expensive for years and have continued to perform in-line with or better than their historical averages. There is an old investing saying, “Markets can stay irrational longer than you can stay solvent!”. Late last year we took losses on a high dividend exchange traded fund and a gold fund, neither of which performed as well as we had expected. We redeployed the proceeds of those sales into the Nasdaq 100 exchange traded fund (ticker QQQ). This security provides exposure to the 100 largest Nasdaq-listed stocks with a heavy weighting in large capitalization technology stocks. Although this segment of the market is not cheap, we feel that with slowing economic growth these companies have the best opportunity to continue growing revenues and earnings due to their dominant market positions in mega trends like cloud computing and artificial intelligence.

 

In our fixed income portfolios, we increased the duration of our holdings last year as we became increasingly convinced that the economy and inflation were beginning to slow. Portfolios are approximately in-line with benchmark duration and quality remains investment grade with the majority being U.S. Treasuries.

 

Administrative Items

 

The 1099s for regular investment accounts will be issued by Pershing LLC between February 1, 2024, and March 15, 2024, by Pershing. Please log into the NetXInvestor site to obtain your tax documents. You can find the tax documents under the Communications tab. We are happy to help your tax advisor as long as you provide us with authorization to speak to them. We can also set them up on our client portal so that they can directly access them. Please send an email to Suzie or Angie with their contact information.

 

We can provide you or your tax advisor with an estimate of your 2023 gains/losses and dividends/interest income for planning purposes.
Please be sure to enroll in on-line access with Pershing if you would like to avoid the new charges for paper copies.

 

You have until April 15 or when you file your tax return, whichever is earlier, to make a 2023 contribution to a ROTH or traditional IRA.

 

As always, we welcome your comments and questions. Please don’t hesitate to call, visit, or email at any time.

 

Letter from Scott 04.03.23

Dear clients and friends,

First of all, I want to thank all of you for the incredible outpouring of support for me and my kids these last few weeks. As you know, we changed the name of the company three years ago to reflect our focus on helping our clients’ families. I had no idea that at the darkest time of my life that the BRAVE family of our clients and friends and my colleagues would be such a help to my family!

At the end of this letter are several examples of the love that my kids and I have been surrounded by which hopefully will also give you a sense of who Marion was for those of you who did not know her.

I have been giving thought as to what my future holds in the wake of what has happened and have decided that my priorities going forward are going to be 1.) my kids; 2.) my health; and 3.) BRAVE.

My kids have been extraordinarily mature and strong; however, the loss that they have endured is going to continue to affect them immensely. I will be spending a lot of time with them and the four of us will find opportunities to be together as a family. They all came home within hours of Marion being stricken and we were together for the subsequent two weeks. Jacqueline is still with me and will be returning to Florida tomorrow. I am travelling to Montana later this week to spend time with our son, Anthony, and will be in New York City later in the month to be with our daughter Alexandra. The four of us will be together in early May for Jacqueline’s college graduation. Marion and I were planning to take Jacqueline to Paris as a graduation present in May or June which I will be doing with my sister.  

I am in reasonable physical shape, but that isn’t going to be good enough from now on. I am now a single parent and I have to do everything I can to make sure my kids do not become parent-less anytime in the next 20+ years. I will be exercising more and eating better and am working to get down to my ideal weight. I have a full-day executive physical scheduled this month which includes bloodwork and various scans to detect calcification in your arteries and cancers among a number of other tests. 

BRAVE is an extremely important part of my life. I expect that will only be more so now. I am not emotionally ready to start regularly interacting with clients. I am working with the team to manage portfolios and I am going to fill quiet time with writing additional content for the website. I am hoping that as I move through April I will be able to ease back into my full role. I just don’t know at this time how things are going to go with the healing process. Please rest assured that I will eventually be spending even more time and energy on BRAVE than I did prior to 3/11 once things are more normal and am looking forward to that!

Finally, I urge all of you to not take your health for granted and make sure that you have an up-to-date estate plan in place. What happened to Marion was preventable had we and her doctors known what was her actual physical situation. The fact that she had a healthcare proxy and a living will made the management of her care smooth and took some of the burden off me and our kids when the extremely difficult end-of-life decision had to be made. 

With warm regards,

Scott

BRAVE Letter – Q1 2023

Dear Clients and Friends,

Happy 2023! 

Looking out over the next twelve months we are not bullish overall on market prospects, but, rather than a year ago when virtually all markets were overvalued, we believe that there are pockets of opportunities in both the stock and bond markets. In this letter we share an update on BRAVE, some recent changes that affect retirement savings and gifting, our current nuanced view on the markets, how we are implementing that view in managing our client portfolios, and a few administrative items.

 

BRAVE Family Advisors Update

BRAVE had a strong year of growth in 2022. We increased our employee count by one-third with the addition of Angie and Will to the team. We moved into larger and more modern office space in Summit (albeit across the hall from our former office!). Despite the market declines we experienced one of our best years for new business in the firm’s thirty-year history. 

Later this month our team will be holding a day-long offsite meeting. We’ll be reviewing the year that was, setting goals for the future, and working with an expert on client experience in an effort to continue to improve ours.

A big “THANK YOU” to those of you who referred family members and friends to BRAVE last year. Our increased capacity allows us to continue working with additional individuals and families who can benefit from our services.

 

Increased IRS Limits

One of the few positives of the current high inflation rate is that the Internal Revenue Service again increased the 2023 limits on gifting and the annual contribution limits on certain types of retirement savings plans.

2022

2023

Annual per person gifting limit $16,000 $17,00
Lifetime gifting limit $12.06 million $12.92 million
401(k) plan contribution limit $20,500 $22,500
Catch-up 401(k) contribution limit over 50 years of age   $27,000 $30,000
Catch-up 401(k) contribution limit over 50 years of age  $6,000 $6,500
Catch-up IRA contribution limit over 50 years of age $7,000  $7,500

 

SECURE ACT 2.0

A number of enhancements to retirement savings were signed into law just before the end of last year. The package, titled SECURE Act 2.0, included numerous changes with the most significant to our clients likely being:

  • Raising the age at which RMDs from retirement accounts begin to 73 in 2023 and 75 in 2033.
  • Catch-up contributions to 401k plans will be increased beginning in 2025 for workers turning 60, 61, 62, or 63.
  • Catch-up contributions for workers earning in excess of $145,000 will need to be ROTH contributions which may have adverse tax consequences.
  • Up to $35,000 can be rolled over from a 529 plan that has been open for at least 15 years into a ROTH IRA account for the 529 plan beneficiary.

 

Market Thoughts: Cheaper But Not Cheap

Our current outlook for markets is significantly more nuanced than it was this time last year as the recent declines have begun creating pockets of opportunity. In our 2022 Outlook letter we described our approach to markets at that time as KISS, which is an acronym for Keep It Simple, Stupid. We believed that markets were historically expensive and the primary factor that justified those valuations, massive government stimulus, was in the process of being taken away and that would result in increased volatility and lower returns. That obviously was exactly what played out in most financial markets. 

This year is not so simple. Equity markets have gotten cheaper but are not cheap at a time when most companies are likely facing increased headwinds in the areas of slowing demand and higher capital costs. Growth stocks and international stocks have begun to unwind their historical overvaluation relative to value and U.S. shares, respectively, but likely have further to go. The Federal Reserve appears unwilling to heed increasingly clear signs of economic weakening which may mean that the yield curve will invert further creating divergent performance within different parts of fixed income.

Last year U.S. markets arguably had their worst performance in at least 100 years. The combined returns of the stock market and the bond market were the lowest since 1931 (Chart 1). This chart is a scatterplot of the annual returns of the S&P 500 (horizontal axis) and the 10-year U.S. Treasury note (vertical axis). However, what set 2022 apart was that there was virtually nowhere to hide. In two of the worst years in modern stock market history, 1931 and 2008, bonds suffered only a small decline or were a positive offset. Last year, bonds performed nearly as poorly as stocks. This was because both markets had been driven to overvaluation by low inflation and extreme levels of government stimulus. When those influences reversed, both markets felt the pain.

 

Chart 1: Scatterplot of Annual U.S. Stock and Bond Returns

 Chart 1: Scatterplot of Annual U.S. Stock and Bond Returns
U.S. stocks are significantly less overvalued than they were a year ago, but are still a long way from being cheap. In most cases the market only looks attractively valued relative to other peak periods such as a year ago or the peak of the Dotcom bubble in 2000 or 1929. The S&P 500 is currently trading at 17.0 times forward earnings which is marginally above average; this multiple has declined in recent months from a high in excess of 22.0 times during late 2021. The risks in declaring equities fairly valued on this basis are 1.) earnings estimates for 2023 have only recently begun to be revised lower and may have significantly further to go and 2.) the interest rate environment has become much less supportive than it had been in recent years.  The U.S. total market capitalization as a % of GDP has declined by over 25%, but is still above the level reached at the peak in 2000 (Chart 2).  The current CAPE ratio (Cyclically Adjusted Price to Earnings ratio) of 27 is down by almost one-third from the recent peak, but is still higher than almost all modern periods other than just before and just after the 2000 peak and 1929 (Chart 3).  U.S. stocks also remain very expensive relative to those in other regions of the world still trading about three standard deviations above their 50-year valuation mean relative to European stocks (Chart 4).  Within the U.S. market, growth stocks have finally begun unwinding their extreme overvaluation relative to value stocks, but are only slightly below their previous peak and are significantly above the long-term average (Chart 5)

 

Chart 2: Wilshire 5000 Total Market Capitalization to US Annual GDP

Chart 2: Wilshire 5000 Total Market Capitalization to US Annual GDP

 

Chart 3: Long-term Historical Cyclically Adjusted PE Ratio with Recessions

 Chart 3: Long-term Historical Cyclically Adjusted PE Ratio with Recessions

Chart 4: MSCI United States Index vs. MSCI Europe Index

Chart 4: MSCI United States Index vs. MSCI Europe Index

Chart 5: Russell 1000 Growth Index vs. Russell 1000 Value Index  

 Chart 5: Russell 1000 Growth Index vs. Russell 1000 Value Index

Bonds on the other hand appear to offer value relative to stocks after their significant declines last year. The yield on the 10-year Treasury note is at the widest premium to the yield on the S&P 500 index in fifteen years (Chart 6). This is happening at a time when the likelihood of a recession seems to be very high based on historically reliable indicators such as the inversion of the yield curve and the downturn in the Index of Leading Indicators (Charts 7 and 8). An economic slowdown should be positive for bonds as inflation would likely slow more quickly while being negative for stocks as corporate earnings would come under more intense pressure.