Joyce Cheng is moving back from San Francisco and will resume her career with McGowanGroup during August as our Chief of Staff! With Joyce’s readdition to the team, Harrison Smith will now devote his primary focus as one of our four wealth managers. The investment in expanding our team’s capabilities underscores the McGowanGroup’s commitments to Excellence in Service and relentless pursuit of Superior Client Profits. We remain fully committed to protecting your portfolios, delivering great service, and owning long term empowering assets.
2024: A Year of New Highs So Far
At the beginning of 2024 our client update included this paragraph: “A 2024 Magic Carpet Ride? One of the primary factors over the past 2 years, of course, was the Federal Reserve interest rate tightening cycle, which corresponded to the bear market of 2022. Future cash flows are worth less when cash rates are relatively high. The Federal Reserve’s most recent projections show a return to a more normal 2.5% over the next 3 years for the Federal Funds Rate and corresponding rates on Treasury Bills. For high cash flow assets, a lower discount rate increases the net present value of future cash flows. So far, so good. Current expectations appear to indicate rate cuts beginning towards the end of 2024”.
Artificial Intelligence: Mania, Hype, and Reality? Yes, Yes, and Yes?
At this writing, Artificial Intelligence (AI) driven technology companies are leading the rally while the Dow Jones Industrial Index is up single digit returns year to date. These tech stocks are continuing a rally well into double digit returns for the year so far. Data center expansion is likely the first phase of capabilities to improve efficiency. Money flows into these stocks are clearly anticipating productivity and profit gains that could take longer than anticipated to materialize for investors.
Profit Impact?
Assuming a 1990’s technology increase in productivity that accompanied internet and PC adoption, The S&P 500 forecasts a potential 33.3% gain in profits before the end of 2025 from the end of Q1 2024. Is this overly optimistic? One danger is over-anticipation of profit increases explaining companies exhibiting multiple expansion. Reasonable valuations, owning great businesses, and real cash flow from earnings could be solutions to that danger.
As of December, Recurrent Advisors estimated that energy infrastructure companies are trading at about six times cash flow. The prospective resulting increase in assets under control per share would equate to about 40% over a 5-year period in addition to the cash dividends.
Global High Yield
Our four primary High Yield managers delivered an impressive 2023. The current yield, equally weighted is currently above 8%. The resulting appreciation potential during declining interest rates could be impressive assuming bonds drift back towards par values or higher as interest rates fall. We have established harvest targets to move portfolios to tactical safety as warranted.
Blue Chip Additions
The McGowanGroup Wealth Management Investment Committee successfully added names from the following sectors: Nuclear, Utilities, Pharmaceuticals, and AI related technology during 2023 dips. Research is ongoing as the McGowanGroup looks to take advantage of future corrections.
Our Next Steps?
Equity Market rallies provide the opportunity to raise tactical safety for future resilience especially as valuation targets are harvested.
A Cautionary Note
Election years provide equal opportunities for rejoicing and lamentations. The temptation to let politics drive portfolio decisions often leads to distraction and mistakes. Let not your heart be troubled, we are on the case and grateful to serve.
We wish you and your family a happy summer and a prosperous rest of the year!
Spencer McGowan and The Team That Cares!
Research Round Up!
Investors are invited to improve decision making with a comprehensive tour of global economics, indicators, and actual results.
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