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Quarterly Letter to Clients

July, 2023

Indices at quarter-end (June 30, 2023):

Dow Jones Industrials: 34,407.60 2Q'23 +3.41% YTD +3.80%

Standard & Poor's 500: 4,450.38 2Q'23 +8.30% YTD +15.91%

For the quarter just ended stocks were up and bonds were down. Inflation is moderating, with a 4% number at the latest reading. I expect that we will soon see a sub-4% figure and the investment community will heave a sigh of relief, even though that level will not satisfy the Fed. That body is indicating two more rate hikes this year. Many believe that next year will see rate cuts; I am not in that camp, but I am open to being surprised.

Last quarter's banking crisis has faded, leaving the powers that be to mull tighter reins on banks of all sizes. Next up was the debt-ceiling "crisis," which turned out to be what it has always been; political posturing. We all want the government to reduce its spending, we all want lower taxes; but we also all want the roads and schools in our area repaired and maintained.

The economy gets a lot of bad press, but it is still humming along. Employment is full, and consumers continue to spend. Housing has slowed significantly, low supply and higher mortgage rates the apparent causes. Still, if property becomes available, it tends to sell rather quickly.

Some time back, Kopin Tan, writing in Barron's, asked: "In a logical world shouldn't valuation help determine one's view of stock's trajectory?" The question stuck with me; the answer seems obvious, but in real life things are never simple, and the world is often not logical. Lately, the companies with the highest valuations have continued to even loftier heights. Momentum begets momentum in the stock market.

To play this game it is of great benefit to be smart. Barring that, it is perfectly acceptable to be lucky. Sometimes people think that lucky is the same as smart; if someone is consistently lucky, maybe that is a form of intelligence. In any event, this year it seems that I am neither.

It is of no comfort that the markets would be flat if not for eight or ten large tech companies. I am still judged (and I judge myself) against the Dow Jones and the S&P.

I do not mind lagging the indices generally, that is a normal part of business, and this is a long-term game. I try to balance the risk, shooting to run somewhere between the returns of the Dow Jones and the S&P in the up years and to be better than those two averages in down years. The Dow has been a poor performer this year, while the S&P has made substantial gains. If my performance had been the average of the two, I would have no complaint.

I tend to make strategic, longer-term moves. For instance, ten-plus years ago, I began shortening the maturities of the bonds that I bought, and then, around two years ago, I stopped buying bonds altogether. These were good moves, obvious in hindsight, and to me, obvious at the time. I replaced bonds with conservative, dividend-paying stocks. Not a bad move either. Lately I have found a home for cash balances in 6-month Treasury bills, yielding around 5.3%. No complaints.

But I did not buy those few giant tech companies that have been powering the averages; the stocks that I did recently buy have underperformed badly; and bonds have been a drag as rates climb. Thus, I find myself behind in the race.

As I grow older, perhaps I grow too cautious. Or perhaps caution will prove to be the right stance. My strategy has resulted in competitive returns over the past 35 years. But this year I am trailing the averages by more than a little. This is affecting my ego as well as my personal and client account valuations. Too much hubris and not enough humility. I guess I have to balance those two factors also. I certainly can't rely on luck.

Jim Pappas