Understanding Invesco’s Aggressive QQQ Proxy Push

November 12, 2025 — Sam H. Fawaz

Several clients have written to me inquiring about the barrage of calls, emails, and messages from Invesco regarding the ETF QQQ’s push to gather proxy votes. Here’s an excerpt of one client’s question and my response (greatly expanded for this article):

“…not the most consequential message you’ll receive this year, but my curiosity has been piqued … by the campaign from Invesco QQQ to cast a proxy vote. I’ve never seen anything like it – the mailings, the calls, and so on – for a process that, in my experience, has always been ultra-routine and pretty meaningless for someone like me. Can you explain, and do you have any advice?”

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Here’s how I responded

Regarding the campaign, you’re not alone. Many clients have noticed the unusually intense campaign from Invesco regarding the proxy vote for Invesco QQQ, and you’re right that it stands out from what’s usually a routine process for most fund shareholders.

Early on, my business partner suggested that I write and send an email to clients about this. Not realizing the intensity of Invesco’s push, I decided we didn’t need to, which turned out to be a mistake. In all my years in the business, I’ve never seen or heard of any company launching such an intense and aggressive proxy gathering campaign.

Here’s what’s really going on

Invesco is proposing to convert the ETF QQQ from its current structure (a unit investment trust, which dates back to the earliest ETFs) into a modern, open-ended exchange-traded fund. The primary rationale is to enhance flexibility, oversight, and reduce costs. Specifically, if shareholders approve, the QQQ expense ratio would decrease by 10% (from 0.20% to 0.18%), resulting in tens of millions of dollars in yearly savings across the fund. Importantly, this change won’t impact QQQ’s strategy, holdings, or tax characteristics, nor will it change the fund’s manager or its index-tracking approach.

The reason you’ve gotten multiple mailings and calls? Invesco requires a high level of shareholder participation: by law, converting QQQ’s trust structure requires more than half of all shares to be actively voted “yes.” Unlike typical votes where non-responses are ignored, in this case, non-votes count as “no” votes—which is why the fund is spending so much to encourage participation and obtain a quorum. With so many retail investors holding QQQ, this is a true logistical challenge.

Details of the push

  • Three separate proposals must all pass: shareholders are voting on three linked items: conversion from a unit investment trust to an open-ended ETF, associated changes to the management/advisory structure, and the creation of a board of directors. If any proposal fails, none of the changes will be implemented.​
  • Non-votes count as “No” votes: Unlike routine proxy votes, shareholders who do not respond are counted against the proposals, making high participation essential.​
  • Shareholder benefits include:
    • Lower expense ratio (from 0.20% to 0.18%, estimated savings ~$70 million/year).​
    • Enhanced governance via a new board overseeing the fund for the first time; greater reporting and transparency, including summary prospectuses and semi-annual reports.​
  • No change to investment objective, index, or tax treatment: The fund will continue to track the Nasdaq-100® Index. The conversion is a tax-free event for shareholders.​
  • Huge outreach effort: Invesco is spending an estimated $40 million on proxy solicitation to ensure quorum, highlighting the unusual scale and importance of this campaign.​
  • Record date: August 15, 2025. Only shareholders of record as of this date are eligible to vote.​
  • If approved, conversion is likely to happen by year-end or early 2026.

Potential downsides of shareholder approval

  • Increased Operational Flexibility Means More Managerial Discretion: The move to an open-ended fund structure allows Invesco and its new board greater latitude in making changes, such as fee adjustments or introducing derivatives, that previously required more restrictive oversight under the unit investment trust (UIT) format. This future flexibility depends on the intentions and discipline of the board and managers, and could shift if there’s turnover in leadership.​
  • Invesco Begins Collecting Direct Management Fees: The new format allows Invesco to collect a “unitary management fee” that the trust structure previously didn’t permit. This creates an incentive to grow profits and, potentially, alter expenses down the line, despite the initial fee reduction.​
  • Board Compensation and Governance Costs: A nine-member board will be introduced, which adds an additional cost layer (director compensation and overhead) that could offset some savings or shift incentives compared to a strictly trustee-based approach.​
  • Liquidity Risk in Market Downturns: Open-ended funds may be forced to sell portfolio assets at unfavorable prices if a large number of investors redeem shares during periods of stress, potentially impacting performance. The UIT structure allows shares to trade among investors without requiring the sale of underlying assets, a mechanism that some investors value for stability during volatile times.​
  • Shareholder Risk in Securities Lending: Invesco may expand its securities lending activities under the new structure, and any resulting risks or losses would be borne directly by shareholders, not by Invesco.​
  • No Guarantee Future Fees Will Remain Lower: While initial projections indicate a 10% reduction in the expense ratio, future changes to fee schedules are possible under the new open-ended structure, subject to board approval.​

While many see these risks as manageable, they should be evaluated alongside the promised benefits. It’s important for shareholders to understand both sides before casting a vote.

What major institutional holders think

Major institutions that hold QQQ have generally leaned in support of the conversion vote, viewing the restructuring as beneficial for both operational efficiency and cost reduction. However, the fund has an unusually large retail investor base, making institutional votes influential but insufficient to guarantee passage, which is why Invesco has mounted such an aggressive campaign.​

  • Institutional Sentiment: Proxy advisory firms and ETF strategists have publicly supported the move, highlighting reduced expense ratios, improved governance via a new board, and enhanced transparency as positives for shareholders. Major institutional holders—including major brokerage platforms, asset managers, and pension funds—are widely expected to vote in favor due to these clear-cut advantages, as their own portfolios will directly benefit from fee savings.​
  • Voting Weight: Institutions typically vote their shares, but approximately 40–50% of QQQ ownership is held by retail investors, and a majority of the outstanding shares must vote “yes” for the conversion to occur.​
  • No Institutional Opposition Spotted: As of now, there is no reported campaign of institutional opposition to the change; the proposal is seen industry-wide as a modernization step that aligns QQQ with other large ETFs.

What I think

This change appears to be designed to benefit shareholders by offering lower costs and greater transparency. Despite the potential downsides, it is unlikely to introduce major surprises or large additional risks.

If you agree, I’d suggest voting in favor; however, you won’t be at any disadvantage if you simply ignore the campaign—the fund will continue regardless. Invesco’s push is simply a matter of meeting the voting threshold they need.

Timing of the vote postponed

The original QQQ conversion proxy vote was scheduled for October 24, 2025. After failing to reach a quorum at the original meeting, the vote was postponed to December 5, 2025.

It sounds like the phone calls, emails, snail mail, and text messages will continue for a few more weeks. Or as they say, “the beatings will continue until morale improves.” Maybe casting your vote will stop all the messages. In any case, it’s worth a try.

Sam H. Fawaz CFP®, CPA, PFS is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other retirement, college, tax, or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

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What’s Going on in the Markets April 6, 2025

April 7, 2025 — Sam H. Fawaz

Last week was no fun. It was a big downer.

Major indexes were down between 9% (S&P 500 index) and almost 10% (NASDAQ and Russell 2000 indexes) last week as the stock market continues its tariff tantrum. The only market components up last week were United States Treasury instruments and the volatility index (which more than doubled last week). Even gold, which had been on a tear to the upside, succumbed to the selling pressure last week.

Institutions are selling stocks (called distribution) at a pace not seen since the COVID crisis. Even during the bear (downtending) market in 2022, we did not see the kind of selling pressure we saw on Thursday and Friday. That smacks of a genuine concern about the tariff’s effects on corporate earnings. In the age of algos and high-speed traders, markets move faster than ever.

Earlier this year, I wrote that stock valuations were at record highs and that the rubber band was getting stretched thin after two years of 20%+ gains in the S&P 500 index.

When analysts announce that corporate earnings are coming down due to tariffs, institutions sell the stocks to bring down stock market valuations to a fairer value. Legendary investor Warren Buffet was in the news late last year and early this year because of his cash stockpile. He’s probably waiting for an opportunity like we see in today’s deflated markets.

The only thing that stopped the selling on Friday afternoon was the closing bell.

Unfortunately, as I write this on Sunday night, a vacuum of positive news on the tariff front has sellers picking up where they left off at Friday’s close (in the thinly traded overnight futures markets). So Monday morning’s open is already not looking too good.

GIVE ME THE BAD NEWS FIRST

More Country Responses: Friday’s sell-off began pre-market when China announced retaliatory tariffs of 34%, equal to our newly imposed tariffs on China. Other countries have made rumblings about not sitting still and will announce retaliatory tariffs of their own. We haven’t heard from the Eurozone, but I’m betting they’re preparing a backlash of their own.

CEO Optimism at Lows: Because of the lack of clarity on tariffs and their impact on their companies, most CEOs have not figured out what to expect for their companies, employees, and operations. If tariffs are to be absorbed, employees will undoubtedly have to be laid off, and perhaps locations or offices will be closed to maintain decent profit margins. Of course, this can be a precursor to a recession. The coming second-quarter earnings calls will be very telling.

Technical Support Areas May Not Hold: Just because prior institutional support in certain price areas of the markets has held before doesn’t guarantee it will hold up again. Sure, we may bounce at upcoming support points, but how long and to what amplitude? Markets that have declined as they did on Thursday and Friday don’t just turn around on a dime, so further weakness should be expected.

Slowing Growth: The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) fell into contraction territory (< 50%) last month at 49%, while the leading New Orders component dropped to a 22-month low, and the Prices Paid Index leapt seven percentage points, warning of increasing price pressures.

Last week, the ISM Services report indicated slowing growth and increasing prices, with four fewer industries reporting growth than during the previous two months. A continued downward trend would be problematic for the broader economy, as services contribute the majority of GDP.

Job Market Wobbles: Challenger Job Cuts rose 60% in March, a 205% increase from one year ago. This marks the highest level for the series outside of the COVID recession. Cuts in government, technology, and retail jobs lead to these numbers.

Friday’s Monthly Employment Situation Report from the Bureau of Labor Statistics, though better than expected with 228,000 jobs created in March, also showed the unemployment rate ticking up to 4.2% (from 4.1%). Nonfarm payrolls increased more than expected, partly due to workers’ return following a strike. A continued increase in the unemployment rate would indicate serious trouble for the U.S. economy.

WHERE’S THE GOOD NEWS?

Potential Dealmaking: Signs that Vietnam and a few other countries want to negotiate lower tariffs are positive and could spark a rally. Suppose the Trump administration becomes overwhelmed with requests for meetings from countries to renegotiate tariffs. In that case, the President may hit the pause button on tariffs to allow enough time for the players to come to the table.

We’re Oversold: Markets are grossly oversold after last week’s barrage of selling, and the rubber band is therefore stretched to the downside. We only need one bit of good news to see a 200-400 point rally in the S&P 500 index. Markets this oversold tend to see a violent bounce (some call it a face ripping rally), though I doubt we’ll see another “V” bottom like we saw post-COVID.

Lower Interest Rates: The betting markets have increased the odds of up to four rate cuts this year by the Federal Reserve, up from one or two expected last month. Stock markets love lower rates and tend to rally on this news. In addition, the yield on the 10-year Treasury Bill is back under 4%, which helps lower government interest costs on its massive debt load, not to mention consumers’ debt load.

Nearby Technical Support: The market indexes are approaching long-term areas where institutions have been willing to buy and support them in the past. At a minimum, it should be an area where we see a robust bounce, if not a one —to three-week rally. Seasonally, April is a positive month for the stock market.

Opportunities abound: You’re getting to buy some of the market’s best stocks at price levels we haven’t seen in years. Some stocks have lost 30%-50% of their value over the last few months. It’s better than a sale at Target Stores!

Still Up Almost 30%: Though the S&P 500 is down 17% from February’s all-time high, we’re still about 30% higher than where we traded at the start of the bull market in October 2022. This puts us back to levels where we traded in April 2024, about a year ago, so essentially, we’ve given back the last year of gains (no, it’s never fun, but no one said the stock market was a one-way ticket upward).

Quantitative Studies: When studying past periods when we had such intense selloffs as we saw on Thursday and Friday, markets tended to be higher 1-12 months out almost every time. While the past is not prologue, in this business of typically 50/50 odds, higher probabilities are the best tool to guide you on what’s more likely than not to happen.

Lower Energy Prices: Oil supplies and recession fears are helping to bring down the price of oil and related energy products. Most recessions are associated with oil price spikes, a nail in the coffin of consumer spending after a long good run. Lower oil prices leave more money in consumers’ pockets for other discretionary spending, which tends to stave off recessions.

WHAT TO DO NOW?

As discussed in Where’s the “Markets in Turmoil” Special published last Thursday, it’s not about what you know in this market. It’s about how you behave or react to what’s happening.

I can’t pretend to know how exactly you’re feeling, but believe me, I’m carrying the weight of an untold number of families’ retirement life savings on my shoulders, so I understand your worry and pressure about what’s happening to your nest egg. As alluring as it sounds, the temptation to sell here and wait for a better time to invest is much harder to pull off than you think. I still know people who left the markets after the 2007-2009 financial crisis and can’t pull the trigger on stocks more than fifteen years later. If you’re truly worried, call your advisor and talk to her or him about the best way to reduce your overall risk.

Even though it’s OK to nibble a little here and there on stocks, it feels too early to go all in and yet too late to sell. While we finally saw signs of panic on Friday, Monday may bring in the laggard sellers who watched the Sunday news shows or logged on to their 401(k) over the weekend. Plus, we can expect some margin call selling for those unable to cover their leveraged positions on Friday.

People and the media casually use the word “crash” when they refer to markets. When I think of a crash, I still remember where I was and how I felt in October 1987, when the markets crashed 20%+ in one day. Sure, a 10% market decline in one week is dramatic, and it hurts, but is it a crash when we’re still up almost 30% from the last bear market bottom?

We have not seen a single-day market decline of 20% or more since the 1987 crash. Following the 22.6% drop in the Dow Jones Industrial Average (DJIA) on October 19, 1987 (Black Monday), market-wide circuit breakers were introduced to prevent such extreme losses. These rules halt trading if the S&P 500 index drops by 7%, 13%, or 20% in a single day.

Since then, the largest single-day percentage declines occurred during the COVID-19 market crash in March 2020, with the DJIA falling almost 13% and the S&P 500 dropping nearly 12%, both well below the 20% threshold.

BUY, SELL OR HOLD?

Ultimately, your retirement and investment future may be defined by:

A. The patience and discipline you exercise today by holding on and waiting for a better day to sell, or;

B. Your fear of the market going lower causes you to be one of the many architects of a coming market capitulation low that the rest of us enjoy, and you have to chase it at higher prices (if you still have the nerve to rejoin us).

As the trade war unfolds, I expect volatility to continue, but a sharp rally can’t be ruled out if key import taxes are renegotiated and adjusted.

While the tariffs announced on April 2nd were greater than markets had priced in, the effect of these levies has yet to be seen, and it will be essential to monitor the increasing recession warning flags in the coming months.

Finally, many who read my stuff know one of my favorite quotes from Peter Lynch, the renowned investor and former manager of the Fidelity Magellan Fund:

“The secret to making money in stocks is not to get scared out of them.”

Now you too know the secret.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

Source: InvesTech Research

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Where’s the “Markets in Turmoil” Special?

April 4, 2025 — Sam H. Fawaz

On the worst stock market day since June 2020, when the stock indexes all lost about 5%, I’m sitting around and wondering, “Hey, where’s the CNBC Markets in Turmoil Special?”

You may be thinking, “My portfolio is down bigly today, and you’re worried about a financial markets TV special?”

Well, yes.

According to financial analyst Charlie Bilello, the S&P 500 has historically generated a positive one-year return every time CNBC has aired one of these specials since 2010. On average, the S&P 500 has seen an impressive 40% one-year return following these episodes (1). “So bring on the Markets in Turmoil special!”

LIBERATION DAY WAS SUPPOSED TO BE GOOD. WHAT HAPPENED?

Kidding aside, the proximate cause of Thursday’s sell-off is President Trump’s announcement on Wednesday afternoon that tariffs on our international trading partners will be hefty.

At first, the markets celebrated when they thought he was only implementing 10% tariffs across the board, but they quickly deflated when, game show style, Trump trotted out his tariff country “score boards” showing the rates that many countries would be paying will be far more. Some countries like Cambodia face tariffs as high as 49%, while Vietnam, widely becoming a manufacturing hub for worldwide companies (such as Nike, Samsung, Unilever, and Intel), faces tariffs of 46%.

In my What’s Going on in the Markets from Sunday, I posited that we may get a post-Liberation Day rally if the tariffs turn out to be lighter than expected. Instead, we got the exact opposite: far worse than anticipated tariffs.

The stock market’s kryptonite is uncertainty. And with Trump’s tariff announcements, we have, dare I say, massive uncertainty. So traders and institutions did what they do when they’re unsure of the overall effect of tariffs on corporate earnings: they sold first and will ask questions later.

Call me crazy, but I don’t think Liberation Day as a coveted national holiday will be a thing anytime soon.

ARE WE THERE YET?

On a year-to-date basis, the S&P 500 index is down about 8.4% and is 12.2% from its intraday all-time high of February 19. The tech-heavy NASDAQ index has lost about 12% year to date, and Small-Cap stocks have had it far worse, down almost double the S&P 500 index.

Historically, the S&P 500 has experienced a 12% pullback approximately once every two years, so this is regular market action. Since this bull (uptrending) market started in October 2022, we had not seen a 12% pullback, so we were overdue for one. It never feels good when you’re in the middle of it.

The question, of course, on everyone’s mind: will it get better or worse?

And the answer is that nobody knows. But based on the steady selling we saw on Thursday, with just a slight pause for a 90-minute market bounce before selling resumed, I would guess that the selling is not yet over.

With many large market participants trading on margin (leverage), it tends to exasperate the selling when large firms overextend themselves. Then, their positions must be liquidated (at the wrong time).

It’s going to take weeks, if not months, to sort out the effects of the tariffs on corporate earnings. I would guess that statisticians will keep tabs on the number of “tariff” mentions on the first 2025 quarterly earnings conference calls starting in earnest next week. And if companies reduce their forward earnings estimates or warn of headwinds ahead, the markets will reprice stocks lower to reflect lower expected earnings. My cynical side forecasts that companies that miss their earnings estimates now have a convenient excuse tucked away in their back pocket.

SELL AND HEAD FOR THE HILLS?

You’ve probably heard the expression: No one ever made a dime panicking.

While uncertainty is the enemy of the stock market, and you don’t have to embrace it, you must also not react with knee-jerk selling because everyone else is. If you have a financial plan, your investing plan considers these occasional roller coaster rides in the markets. Therefore, you don’t throw away your plan at the first sign of volatility. Besides, when you sign up for the higher rates of return of the stock market, volatility is the price you agreed to pay for those higher rates.

One of the secrets to great investing is that you don’t have to know everything. And even if you do, it probably won’t make you a better investor.

Do you know what will?

Better behavior during a market selloff makes you a better investor. Resist the urge to give into your fear and follow the crowds out of the markets before your portfolio supposedly heads to zero (the same applies to resisting the fear of missing out). No wonder every Dalbar study of individual investors year after year shows that the majority never perform as well as the funds they own.

Nibbling here and there on the way down to take advantage of Wall Street’s sales makes for better behavior. Buying when stocks are down appreciably from nosebleed levels: that’s good investor behavior. And trimming positions that are at nosebleed levels, if you own them, is good investor behavior.

I was reminded today of a quote by well-known financial behaviorist and author Morgan Housel, who wrote in his book The Psychology of Money (highly recommended):

“Good investing is about how you behave, not what you know. Investing rewards those who can sit still when everyone else panics”.

THIS TOO SHALL PASS

If you already have a financial advisor and find the markets’ action worrisome, contact him or her (if not, feel free to contact us). Perhaps your risk tolerance is not as high as you thought when the markets kept going up. Sometimes, tweaking your investment allocations can help you sleep soundly again.

While I don’t know when things will turn around, I know that every day gets us closer to a durable bottom. Markets are oversold, and that bounce-back rally could start tomorrow, Monday, or the following week. Buying a little at these levels is almost always a good idea when you look back 12-18 months. And if you need to trim your positions, you can use any rally to help cut your losses.

We have continued to nibble on some added positions for our client portfolios, adjust our hedges (2), and sell option premiums into the elevated volatility. The day will come when we can jettison our hedges, but we’re keeping them for now…

At least until we get a Markets in Turmoil Special.

Disclaimer: None of the foregoing is a recommendation to buy or sell securities. Please consult with your financial advisor before taking any action.

Footnotes:

(1) However, it’s worth noting that this data is based on a limited sample size during a predominantly bullish market period. Bilello cautions that the results might not hold in a prolonged bear (i.e., a downtrending) market.

(2) Hedging is any approach to investing that reduces your overall market exposure risk and volatility.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

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What’s Going on in the Markets March 30, 2025

March 31, 2025 — Sam H. Fawaz

Consumers continued to sour on the economy in a week when the only components heading north were market volatility, precious metals, and energy prices. The stock market struggled to sustain positive momentum early in the week following its sharp drop into correction territory (1) earlier this month.

For the week, the S&P 500 index lost 1.5%, the tech-heavy NASDAQ slid 2.6%, and the small caps shrunk almost 2%. Even bonds of every kind showed weakness, which is uncharacteristic of a weak stock market, where treasury bonds tend to see an inflow of capital to “safety.” Institutions continued to press the sell button in a re-acceleration of distribution (2).

CONSUMERS LOSING CONFIDENCE

Economic news didn’t help things much last week.

New Home Sales from the U.S. Census Bureau rose marginally. However, the inventory of unsold new homes also increased to 500,000, the highest level on record outside the last housing bubble. Worse yet, most new homes for sale are still under construction, while only a quarter of the unsold new homes are completed.

This is a concerning sign for homebuilders that the inventory glut will likely continue to grow, and elevated inventory often precedes housing market slowdowns and economic downturns.

Pending Home Sales for Existing Homes from the National Association of Realtors also ticked up slightly, though they remain near the lowest level in the series’ history.

A confident consumer is a consumer who is willing to spend money, and spending money keeps the economy strong and helps to create new jobs.

Unfortunately, Consumer Confidence tumbled to 92.9, falling below its 2022 low. Most concerningly, the most significant drop was in the leading Future Expectations Index, which plummeted to 65.2, its lowest since 2013 and well below the Conference Board’s Recession Warning Threshold of 80.

The final reading for March’s Consumer Sentiment confirmed the crumbling of consumer attitudes, also declining more than expected. The Overall Index dropped to 57, its lowest level since 2022. It also showed the greatest weakness in the leading Future Expectations Index, which fell 11.4 points to 52.6 in its most significant single-month drop since August 2022.

A leading reason for the sharp reversal in consumer psychology is a concern over reheating inflationary pressures. Consumer Sentiment Inflation Expectations for the year ahead jumped from 4.3% to 5%, logging a third month of significant increases of 0.5 percentage points or more.

These inflation fears were validated on Friday as the Federal Reserve’s preferred inflation measure exceeded expectations. The Core Personal Consumption Expenditures (PCE) Price Index rose to 2.8% following an upwardly revised reading last month. This remains stubbornly above the Fed’s 2% target, indicating a reheating of inflation pressures and further complicating the Fed’s battle.

The administration’s trade and tariff battles will not help with inflation, which also weighs on the minds of consumers and businesses of every size.

GOOD RIDDANCE 1ST QUARTER OF 2025

With one trading day remaining in the first quarter of 2025 (Monday, March 31), besides a robust rally in precious metals and overseas markets, there’s not much to celebrate in U.S. Stocks.

After a solid 2024 (and not counting Monday’s trading activity), the S&P 500 index is on track to shed 5.1%, the NASDAQ will slide 10.3%, and the small caps will show losses of 9.6% for the first quarter of 2025. It’s not the start to the year that most were expecting with the optimism in the new incoming administration.

Energy and healthcare are the two strongest sectors year-to-date (up 8% and 5%, respectively), while technology and consumer discretionary, two of the largest sectors, are the weakest (down 12% and 11%, respectively).

In a sharp reversal from 2024, the United States is one of only six major global markets down year-to-date. Twenty-two global markets look to show gains, with ten up double-digit percentages year-to-date (Spain, Italy, and China are the best, while the United States, Taiwan, and Turkey are the worst).

Diversification outside the United States (and, for that matter, outside of domestic big cap technology) over the past couple of years has been a headwind, but it has now turned into a tailwind.

IS THERE ANY GOOD NEWS?

The good news is that we are entering the month of April, which tends to have market tailwinds at its back and is one of the most frequently positive months of the year (especially when January is positive, which it was). We also have signs of oversold conditions, but not overly so. But first, we must see the market show signs of stabilization and a let-up in the selling.

So far, what bounces have come along have been sold as investors sell first and ask questions later ahead of the April 2 “Liberation Day,” when many new tariffs are expected to take effect.

On a positive front, some think April 2nd will be a “buy the news” event after “selling the rumor.” Indeed, we should have more clarity after that date than now, and markets often celebrate less uncertainty.

The President’s announcement last week of 25% tariffs on all imported cars certainly didn’t help consumer sentiment or inflation expectations. But it did create a rush to car dealerships this weekend, where I imagine scenes akin to Black Friday sales to get ahead of the tariff deadline. That’s one way to pull forward car demand into a busy (springtime) month and quarter end. I don’t think these tariffs are going away.

If you’re in the market to sell your used vehicle, waiting a week or two could yield a higher selling price. On the other hand, if you’re in the market for a used vehicle, you may want to speed up that process because used car prices will likely move upward as new auto tariffs go into effect.

It’s widely cited among investing professionals that the bond market is smarter than the stock market. And if there are genuine recession or growth fears, corporate bonds certainly aren’t showing them, at least not yet.

One measure of bond sensitivity to economic conditions is the yield spread between the lowest-rated investment-grade bonds (AKA Incremental BBB-rated US corporate bonds) and yields on the Investment-Grade aggregate index. That differential is still quite low at 23 basis points (3). So, while stocks show signs of a growth scare, the corporate credit market does not, and that’s a positive for the markets overall.

SO WHAT SHOULD I DO NOW?

It’s often said that Wall Street is the only place on the planet where they throw a sale, and people run the other way. Not only that, but they line up at the return desk, toss their undesired merchandise at the clerk, and are willing to accept much less than they paid for the same merchandise still in its original packaging. Yes, I’m talking about stocks.

If you consider yourself a long-term investor and are not taking at least a slight advantage of the (10%-30% off) sale on Wall Street, then are you a real investor? Many of the market’s hottest stocks are selling for 10%-30% off. Will you regret not buying some of them when you look back 12-18 months from now, especially if April 2nd turns out to be the bottom?

Sure, the markets can go lower, and they will probably do so in the short term. But in six months or more, will you remember why you even thought of shedding most of your portfolio or couldn’t pull the trigger on some new buys? And if you look smart selling today and the market goes lower, when will you know it’s safe to return? Trust me; it’s a lot harder than it sounds.

We’ve been buying stocks and doing additional light hedging for our client portfolios. It’s not easy, but sometimes you have to hold your nose, close your eyes, and buy something good.

TURN OFF THE BOOB TUBE OR THE IDIOT BOX

If you’re watching or listening to the carnival barkers on financial media, they will try to scare you witless.

When you tune into the weather channel, are they interviewing people basking in the Hawaiian sunshine, smiling and sipping on a Mai Tai? Or are they looking at the worst weather disaster in the nation and making you feel like your region is next to get hit, only to try and keep you glued to your seat?

That’s right. Sounding pessimistic, forecasting market crashes, predicting a currency crisis, or warning of a deep financial depression ahead might keep you tuned in endlessly, but all it will get you is depressed and won’t make you a dime.

Besides, if things were ever as bad as they make them sound, do you care if your portfolio heads down another 5%-10% in the short term if you zoom out 6-18 months on any long-term index chart?

I don’t. And neither should you.

Disclaimer: None of the foregoing is a recommendation to buy or sell securities. Please consult with your financial advisor before taking any action.

(1) A correction is a pullback in a stock market index closing 10% or more below its all-time high.

(2) Distribution refers to selling or transferring large quantities of stocks or other securities by institutional investors, such as mutual funds, hedge funds, or pension funds.

(3) A basis point is 1/100th of a percent. One percent, therefore, equals 100 basis points.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

Source: InvesTech Research and The Kirk Report

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What’s Going on in the Markets March 16, 2025

March 16, 2025 — Sam H. Fawaz

All the major indexes, including the Dow Jones Industrial Average (30 stocks), S&P 500, Nasdaq, Russell 2000, and even the Wilshire 5000, closed at new 6-month lows on Thursday before a robust bounce on Friday.

Although at its worst moment on Thursday, the S&P 500 index was down almost 10.5% from its recent 52-week high, it managed a decent bounce on Friday but still closed down 8.3% from that peak. Year to date, the index is down 4.1%.

For the week, the S&P 500 lost 5.3%, the NASDAQ dropped 5.8%, and the small caps continued their persistent weakness, falling 5.5%.

Market leadership, especially among technology stocks, showed further deterioration this week, and bearish distribution (institutional selling) continued accelerating. By the end of the week, investor sentiment bordered on extreme fear, one element in the making of a robust market rally.

Though there’s not much to be happy about as an investor, keeping the current pullback in perspective is essential. The S&P 500 index is trading back where it was in mid-September 2024, a mere six months ago. The S&P 500 is still 60% higher than the low made at the start of the current bull market (uptrend) in mid-October 2022.

IT’S THE ECONOMY

Not helping things last Tuesday, the Small Business Optimism Index from the National Federation of Independent Business (NFIB) fell to 100.7 for February (from 102.8 in January and 105.1 in December). The Uncertainty Index rose to its second highest level in the series history—just below the reading reached in October last year.

Uncertainty on Main Street has led to fewer small business owners viewing this as a good time to expand or expecting better business conditions. Enthusiasm over the Trump administration’s expected pro-business policies has faded quite a bit.

More favorably, the Bureau of Labor Statistics’s Consumer Price Index (CPI) and Producer Price Index (PPI) came in slightly cooler than expected for February, reflecting inflation easing. However, underlying data in both inflation measures indicate that the Federal Reserve’s preferred inflation measure, the Core Personal Consumption Expenditures (or PCE, which comes out at the end of the month), will likely continue to be stubbornly elevated.

Consumer Sentiment drives consumer spending and buoys corporate earnings. Confident consumers are essential to a strong economy, or at least one that can avoid a recession.

Friday’s Overall Consumer Sentiment Index report from the University of Michigan fell dramatically (down 6.8 points to 57.9) for the third consecutive month on concerns ranging from personal finances and the stock market to inflation and labor markets. The Current Conditions Index slid to 63.5, and most concerningly, the Future Expectations Index tumbled 9.8 pts to 54.2, its lowest level since July 2022. Year-ahead inflation expectations spiked to 4.9%, the highest since November 2022.

All three sentiment indexes are now at historically low levels rarely seen outside of recessions. The rapid decline in Consumer Sentiment reflects increased uncertainty about individuals’ perceptions of their financial situation. Uncertainty regarding the future can quickly materialize into a slowdown if consumers cut back on spending or delay big purchases.

This sentiment report marks the most significant two-month increase in inflation expectations since 1980. Consumer attitudes have rapidly changed since the end of last year, and this report headlines the collapse of speculation and exuberance that drove the stock market last year.

IS EVERYTHING BAD OUT THERE?

By most measures, the current pullback has been somewhat orderly, with few signs of investor panic or institutional wholesale dumping of stocks. Some would prefer to see signs of investor panic and some kind of “whoosh” to the downside to signal that a bottom might be in. Instead, what’s happened is a slow “drip” lower akin to water torture that persists for an unknown duration.

As optimistic and pessimistic investors pray for a sustainable bounce, they tend to have opposite objectives. The optimist wants the market to go up to validate their “buy the dip” mentality and produce profits as rewards for their bravery. The pessimistic investors recall past severe market cycles and feel trapped in the market. They will use any bounce or rally to sell stocks and perhaps declare, “Never again!”

These opposing forces are at play on any market day. Still, when the markets decline persistently, as we’ve seen since February 20, the battle between optimists and pessimists can bring about strong emotions and perhaps opposite actions or reactions to the fear, uncertainty, and doubt surrounding a weak market.

So how has this resolved itself in similar scenarios in the past?

A COUPLE OF QUANT STUDIES

We can look to quantitative (quant) studies to help answer the foregoing question.

Analyzing past market historical statistics, often called quantitative analysis, can lead one to believe the market is predictable by studying past patterns. Nothing, and I mean nothing, has definitive predictive power, but humans tend to repeat behaviors repeatedly, making some of these quantitative measures somewhat valuable for review and consideration. They are mere data points in a collection that make up the bulk of market-generated information.

Here are summaries of a couple of quantitative studies from Carson Investment Research:

Quant Study 1: Since World War II, the S&P 500 index has experienced 48 market pullbacks of 10% or more (a 10% pullback is called a “correction” by many). If you subscribe to the notion that a 20% pullback constitutes a definitive bear (downtrending) market, then 12 of those 48 pullbacks (25%) went on to pull back 20% or more. That means that 75% of the time, a 10% pullback did not lead to a bear market.

Quant Study 2: In addition, if we are heading for a 20% pullback, this would be the third 20% pullback in less than five years, something that has never happened since 1950 (which doesn’t mean it can’t happen). Going back to 1950, the last time we had three bear markets this close to each other was between 1966 and 1973, a period spanning 6.9 years. So, another bear market in 2025 would be pretty rare.

So, while most 10% corrections don’t evolve into bear markets, the hot money traders’ continued complacency and quick-bounce expectations can often precede more significant downturns. Buying the dip, which has worked for years, works until it doesn’t.

GREEN SHOOTS OR BROWNOUTS?

Friday’s bounce notwithstanding, the current price action favors more potential downside unless the market immediately follows through on Friday’s rally to the upside. The market is now significantly oversold, which is historically associated with strong bounces or significant trend changes (from downside to upside). In addition, March corrections frequently stage oversold bounces into recoveries into the end of the calendar quarter.

On another positive note, the next few weeks are seasonably favorable for a continued bounce or rally. This means that historically, this time of the year has been favorable for the markets. If Friday was the spark for a bounce, it could entice more participants to join so they don’t miss the bounce. After all, a rout we’ve seen over the past four weeks deserves more than a one-day wonder rally like we saw on Friday. Indeed, we’ve seen strong reactions to past selloffs comparable to this one. But as they say, “past results don’t guarantee future performance.”

WHAT NOW?

If you’ve been anxious or nervous about market action over the past few weeks, you likely have too much exposure to the stock market. Therefore, it’s prudent to talk to your financial advisor about reducing your overall risk to the “sleeping point.”

If you are the chief investment advisor of your portfolio, take advantage of any rally or bounce to reduce your exposure to better suit your overall risk tolerance. (1)

I won’t repeat everything I said in last week’s What’s Going on in the Markets March 9, 2025. But it bears repeating that we anticipate having a correction of 10% or more at least 1.1 times per year, so this lousy action is normal and shall eventually pass.

A 10% correction turns into a 15% correction about every 40 months (0.3 times yearly). So sure, it could get worse before it gets better, but I’m still not seeing wholesale evidence of a full-on recession or bear market headed our way. We don’t yet have enough proof of that.

If this turns out to be a garden variety correction, and I think it is, taking advantage of the opportunity will pay off for those who have a long-term investing time horizon and are brave enough to step up and buy (it’s never easy to do so, but we did some light buying for our clients last week.) (1)

One of my favorite financial advisors, Keith Fitz-Gerald, often says, “History shows very clearly that missing opportunity is more expensive than trying to avoid risks you can’t control.”

I agree wholeheartedly. Focus on what you can control, and don’t miss the opportunities.

(1) Disclaimer: Nothing in this article recommends that you buy or sell any security. Please consult with your financial advisor before taking any action.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

Source: InvesTech Research and The Kirk Report

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What’s Going on in the Markets March 9, 2025

March 9, 2025 — Sam H. Fawaz

The S&P 500 index had its worst weekly loss since last September, as tariff headlines and uneven economic data are causing investors anxiety. The index lost 3.10% on the week, the tech-heavy NASDAQ lost 3.45%, and the small caps lost 4.3%. The S&P 500 index is 6.1% away from the last all-time intraday high made on February 19.

It’s helpful to remember that, on average, markets have two or three pullbacks from a peak measuring 5% or more each year, and you can expect a 10% pullback once every 11 months. This pullback feels worse than it is, perhaps due to the relatively smooth upward ride we enjoyed for most of 2024.

Despite universally bullish and euphoric forecasts by all the major brokerage firms entering 2025, the S&P 500 index is now down 1.9% year-to-date. On a more positive front, the domestic Dow Jones Industrial Average Index (30 stocks) is up 0.6%, international stock indexes are up—some double-digit percentages, and dividend-paying stocks and bonds of all kinds are also still up year-to-date. Got diversification?

Downside leadership in the form of institutional selling of stocks (distribution) intensified last week and could be worrisome for the intermediate-term uptrend (bull market) if it doesn’t subside soon. Towards that end, signs that the markets are oversold emerged last week, raising the possibility of a robust bounce back in the coming weeks.

A COMING RALLY?

Indeed, the market indexes closed up with a bounce on Friday, which is uncharacteristic of the markets lately. Recent Fridays reveal five down Fridays out of the last seven, with fears of potential weekend headlines bringing a down opening for the markets the following Monday.

While Friday’s rally is a good start, we need a strong follow-through rally day to mark the return of investors’ appetite for domestic stocks and lay the path for a sustainable bounce or rally.

So far this year, the markets have followed the script for higher volatility during the first year of a new presidential administration. A consolidation (i.e., “digestion” of significant gains by stocks) is expected following more than two years of double-digit gains since the uptrend started in October 2022. Momentum-driven artificial intelligence stocks have been hit the hardest in this pullback.

You can attribute some of this volatility to the tariff wars’ tit-for-tat action, the ongoing peace negotiations for Ukraine and the Middle East, or deteriorating economic data, but regardless of the news headlines, we knew 2025 would not be the smooth ride we experienced in 2024.

RECESSION AHEAD?

While a recession and a bear (downtrending) market usually go hand in hand, there’s not enough evidence to say we’re definitively heading for a recession. While some Gross Domestic Product (GDP) estimates indicate an unexpected contraction in the first quarter of 2025, the quarter isn’t over yet. And, to declare an “official” recession, there must be two quarters of negative GDP, so we won’t know until mid-year.

Bloomberg’s Recession Probability Forecast just edged up to 25% after residing at a very low 20% for much of January and February. Of course, the current projection is right at the average for the measure dating all the way back to 2009. The odds of a contraction stood at more than 50% for much of 2022 and 2023, yet two quarters of negative GDP growth never materialized.

CORPORATE EARNINGS STRONG

The latest quarterly corporate earnings have held up great, and while there may be some deceleration in profits in the second quarter of 2025, the back half of 2025 looks to have earnings re-accelerate.

The main concerns cited by CEOs in their earnings conference calls are the uncertainty about tariffs and the new administration’s ever-fluid policies, which affect their planning for the future. Hence, their profit outlook was less ebullient than usual.

Certainly, earnings expectations will be tempered should the latest tariff skirmish be long-lived, but Corporate America is generally in good financial shape, and management teams have experience navigating prior levies.

There’s a saying in this business that “corporate profits are the mother’s milk of stocks.” If corporate earnings remain strong, that will lead to the return of strength in stocks.

ECONOMIC DATA MIXED

Jobs and housing data have lost some steam over the past several months, and they bear monitoring in the short term. While this slowdown could be an ominous sign, the economy may be experiencing what some call a “mid-cycle growth scare.”

The February ISM Manufacturing Purchasing Managers Index (PMI) ticked down to 50.3. However, the Prices Index increased significantly, and the Employment index dropped by 7.5 percentage points. This combination of stubbornly rising prices and falling employment indicates that the Federal Reserve’s battle with inflation is far from over.

The ISM Services PMI for February increased fractionally from 52.8 to 53.5. Like the Manufacturing PMI report, the Prices Index increased to 62.6, marking its third consecutive monthly reading above 60.

Respondents from both surveys expressed major concerns surrounding tariffs, government spending cuts, and heightened uncertainty ahead.

Friday’s February jobs report from the Bureau of Labor Statistics came in below expectations, while the unemployment rate ticked back up to 4.1% from 4.0% in January. Though the addition of 151,000 new jobs was better than many had feared, the recent government layoffs will likely not appear in the data until the coming months.

INFLATION AND INTEREST RATES

Inflation pressures are weighing on the market, as is their effect on short-term interest rates. Coming into 2025, we were expecting one or two short-term interest rate cuts by the Federal Reserve (the Fed). Lately, speculation about whether it would be zero or only one rate cut (or even a rate hike) has also weighed on the markets.

But given policy uncertainty, Fed Chairman Jerome Powell soothed the markets a bit on Friday with a speech in which he implied that the Fed would be ready to act should administrative policies cause an unexpected economic slowdown. In other words, two or more rate cuts might be on the table for 2025 should conditions deteriorate faster or worse than expected.

CHOPPY WITH POCKETS OF MARKET STRENGTH

Overall, while March stock markets have felt awful, seeing pockets of strength in overseas markets, bonds, value, and dividend stocks says that institutions aren’t really that bearish and selling anything that isn’t nailed down. Indeed, if you look at the equal-weighted S&P 500 index, it’s still up 0.45% year-to-date and has held up better than the cap-weighted S&P 500. Even the equal-weighted NASDAQ Index is flat year-to-date.

For our clients’ portfolios, we have been trimming profitable stock positions, adding to other new ones, and increasing our market hedges in case this market pullback proves stubbornly persistent. While the current weight of evidence has not signaled the end of the long-term bull (uptrending) market, there are indications that the current weakness and choppiness may persist in the short term.

To be clear, that doesn’t mean we feel that bearish forces are dominant, given that the proverbial bullish baton has been passed to other market segments, which are now flourishing in an environment where some air has been let out of the technology stock bubble.

DON’T LET THEM SCARE YOU

Regardless, anything can happen as we go forward, and we know that trips to the downside are always part of investing. Still, barring any unforeseen shocks, I don’t expect this pullback to unravel badly enough to wreck the long-term uptrend and plunge us into a new bear (downtrending) market. The quality and magnitude of the next market bounce will tell us whether this pullback phase is over.

A reminder that volatility is the price we pay to enjoy the outsized returns in the stock market. Sure, you could sell everything and get back in “when the water’s safe,” but good luck with timing that (much easier said than done!)

In fact, this might be the time to take advantage of the pullback to buy or add to positions that were too expensive just a few weeks ago—if not now, when? Disclaimer: This is not a recommendation to buy or sell any securities.

Remember, as legendary Fidelity Magellan Fund portfolio manager Peter Lynch once said, “The secret to making money in stocks is not getting scared out of them.”

And whatever you do, turn off the news and the media, whose only job is to keep your attention glued to their every word for as long as possible. They’ll scare you witless if you let ‘em.

Don’t let ‘em.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

Source: InvesTech Research

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Markets & Macroeconomic Summary for the Week Ended December 27, 2024

December 29, 2024 — Sam H. Fawaz

The S&P 500 index closed 0.65% higher in a volatile, shortened holiday trading week. The NASDAQ index gained 0.75%, while the small caps were slightly positive, up 0.21%. The Microcap index outperformed for the week, bouncing up 1.3%. Additional signs of bearish distribution appeared this week.

Another holiday-shortened trading week is ahead, with the stock markets closed on New Year’s Day. Whether Santa can right his sleigh and deliver further gains in his traditional year-end rally remains to be seen.

Durable Goods, a volatile data series, was better than expected. It showed that new orders for key U.S.-manufactured capital goods surged in November, up 0.7%, amid strong demand for machinery. However, new orders were down 1.1% month-over-month, missing expectations.

The Conference Board’s consumer confidence reading was down from last month’s reading and notably lower than forecast. The Present Situation and Expectations Indexes fell, with the Expectations Index just slightly above the Conference Board’s 80.0 “recession threshold.” This was surprising given the renewed post-election euphoria and optimism expected to continue.

While only a single monthly data point, it is surprising that the post-election rebound in Consumer Confidence was not sustained. If consumer attitudes continue to sour and spending slows dramatically, it can significantly impact the stock market and economy in 2025.

New Home Sales from the Census Bureau were up 5.9% in November. Sales rose despite decades-high mortgage rates, mainly due to a drop in the median sales price, which saw its lowest price tag since February 2022. New home inventory was down slightly and represents a supply of 8.9 months at current prices.

Key housing-related stocks have continued to suffer due to rising interest rates. The 30-year mortgage rate from Freddie Mac rose to 6.9% this week, notably higher than its interim low of 6.1% in late September. Continued housing weakness could also indicate impending economic and stock market weakness.

Source: InvesTech Research

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Your Returns Versus the Market

September 2, 2013 — Sam H. Fawaz

One of the most misleading statistics in the financial world is the return data we are routinely given by the financial media, telling us how much investors made in the markets and in individual stocks or mutual funds over some time period.  In fact, your returns are almost guaranteed to be different from whatever the markets and the funds you’ve invested in have gotten.

How is this possible?  Start with cash flows.  We are told that the S&P 500 has delivered a compounded return of about 7.8% from 1992 through 2011, which sounds pretty positive until you realize that this return would only be available to somebody who invested all his or her money at the beginning of 1992 and didn’t move that money around at all for the next twenty years.  If you invested systematically, the same amount every month, as most of us do, then you would have earned a 3.2% compounded return.  Why?  A lot of your money would have been exposed to the 2008 downturn, and not much of it would have enjoyed the dramatic run-up in stocks from 1992 to 2000.

In addition, there is the difference–only now getting attention from analysts–between investor returns and investment returns.  Human nature drives investors to sell their stocks and move to the sidelines after their portfolios have been hammered–which is often the worst possible time to sell.  And it drives people to start increasing their equity allocations toward the peak of bull markets when they perceive that everybody else is getting rich.  That means less of their money tends to be exposed to stocks when the market turns from bearish to bullish, and more is exposed when markets switch from bullish to bearish.

Understand also that owning a diversified portfolio means that only a portion of your investments are exposed to stocks. Assets such as cash, bonds, real estate, commodities and other non-stock investments all have returns that are inherently different than stocks, making overall portfolio return comparisons an “apples to oranges” one.

This would be bad enough, but people also switch their mutual fund and stock holdings.  When a great fund hits a rough patch, there’s a tendency to sell that dog and buy a fund that whose recent returns have been scorching hot.  Many times the underperforming fund will reverse course, while the hot fund will cool off.  The Morningstar organization now calculates, for every fund it follows, the difference between the returns of the mutual fund and the average returns of the investors in fund, and the differences can be astonishing.  Overall, according to Morningstar statistics and an annual report compiled by the Dalbar organization, investor returns have historically been about half of what the markets and funds are reporting.

And then there’s the tax bite.  Some mutual funds invest more tax-efficiently than others, and generate less ordinary income.  Beyond that, if a fund is sitting on significant losses when you invest, you get to ride out its gains without having the tax impact distributed to your 1040.  If the fund is sitting on large gains when you buy in, you could find yourself paying taxes on gains even if the fund loses money.

Sources:

http://www.forbes.com/sites/financialfinesse/2012/06/20/why-your-investment-returns-could-be-lower-than-you-think/

http://www.thesunsfinancialdiary.com/investing/understanding-ms-total-return-and-investor-return/

http://corporate.morningstar.com/cf/documents/MethodologyDocuments/FactSheets/InvestorReturns.pdf

My thanks to Inside Information publisher Bob Veres for his contribution to this post.

Posted in General, investing, markets, retirement. Tags: , , , , . 1 Comment »

Stock Market and Economic Update August 21, 2011

August 21, 2011 — Sam H. Fawaz

The past week hasn’t been particularly kind in the stock markets as we saw little follow-through on the previous week’s rally. My upside target of 1230-1260 in the S&P 500 index was not even approached before selling resumed at around 1208.
 
A few economic reports from last week have me a bit more concerned about the possibility of a recession within the next twelve months.  Although the economic leading indicators that I’ve come to rely on from the Economic Cycle Research Institute turned up again this past week, the only components to rise were financial ones, namely the money supply (with the stock market selling being a contributing factor) and the steep yield curve (ultralow interest rates on short duration debt versus higher rates on longer duration debt made possible by the Federal Reserve’s low interest rate policy). Without these two components, the index would have been down 0.5%, which is down three of the last four months.  Weekly unemployment claims came in at 408,000 whereas they were starting to trend below 400,000 in the last few weeks.
 
So the volatility in the market right now is at least partially attributable to concerns about whether a recession is on the horizon or not. If one is not, then the market is undervalued. If one is, then the market is overvalued. So far, the weight of evidence of a recession is still inconclusive, but it appears that institutional buyers are starting to “discount” that possibility as they demonstrate through selling in the markets.  The research I read is split about 50/50 about whether a recession is coming, with convincing cases made on both sides.  My feeling is that we have a bit further to go on the downside if economic factors or confidence measures don’t start pointing up real soon.
 
Accordingly, I am becoming increasingly concerned about the behavior of the markets and the economic numbers coming out lately since they haven’t been particularly encouraging. Accordingly, this past week I increased my clients’ hedges and continued to slightly reduce exposure to equities just to be on the safe side. 
 
This week will be critical since the Federal Reserve Chairman (Ben Bernanke) will be speaking on Friday and will reveal any further measures they may take to ease recession concerns and restore confidence to the markets.  More information about how the Eurozone will handle its debt crisis should help calm the markets.  But based on the market action on Thursday and Friday, it seems that many institutional and retail investors are not waiting to hear what the Chairman has to say or what solution the Eurozone might propose to avoid a deepening debt crisis.  They have therefore been selling and may continue doing so into this week.
 
I will continue to monitor the markets day to day and make further adjustments to portfolios and increase hedges as conditions warrant. Since the market is heavily oversold, we should expect some level of a bounce this week, if only for folks to prepare for any surprise announcement the Federal Reserve Chairman might offer to help propel markets higher.

Bottom line, it’s too early to reach conclusions about whether or not the April high was an important top in the market. If it was, it was unlike any market top of the past 50 years, with both the LEI and market breadth still hitting new highs after the top. When panic selling spreads across the board – good quality companies go down along with the overvalued speculative stocks.  I can say that barring some type of financial Armageddon, I believe the downside valuation risk in this market is far less than in 2007-08. 

My major equity allocation decision is to give this market more time before making any major adjustments. What is needed –more than anything else– is stability and confidence. Only time and stability can calm the emotional extremes and fears, which still come out of the woodwork on a daily basis. But as I’ve said, if the retest (of the S&P 500 index lows of 1100) is able to hold above the lows of last week, then it could provide a strong market base if evidence of a recession does not increase in coming weeks.

Again, please do not take this message as advice to buy or sell any securities; please consult with your investment advisor (or us!) This message is not intended to forecast what will happen in the market since no one (including me) can do that. My objective is to share what I’ve been hearing, reading and researching, the end result of which is one of cautious optimism.
 
Please don’t hesitate to contact me if you need any help with your personal financial situation or investments.  I welcome your feedback and questions always.

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Why I Don’t Trust This Rally

August 15, 2011 — Sam H. Fawaz

We finally strung together three up days in a row in the stock markets today and that’s a good thing. Volatility is ratcheting down and folks are stepping in to scoop up bargains.  Unfortunately, for the first time since we bottomed back in March 2009, I don’t trust this rally and believe that we are headed back to test last week’s low of 1,101 on the S&P 500 index in the short term.  If the market doesn’t hold at that level, our next stop is likely 1060. Let me explain why this rally has a lot to prove before I believe that this correction is over:
 
1.  Other than relieving an oversold condition, not much has changed fundamentally between last week and today. Uncertainties are abound about the possibility of a recession starting or already started (which I don’t believe), how we’re going to deal with raging federal deficits, and the Eurozone debt crisis. A meeting between German and French officials tomorrow will shed some light on how they will deal with the debt crisis in Europe.
2.  The three day rally that began last Thursday has occurred on light volume, reflecting very little institutional participation.  Institutions often wait for retail investors to bid up the market after a severe selloff to set it up for more selling.  The selling has been coming in on very heavy volume while buying is coming in on light volume, a bearish sign.
3.  Consumer confidence, as measured by the University of Michigan survey released last Friday, was at a record low.  These levels have not been seen since the great recession (but do reflect the recent anxiety over the recent U.S. debt ceiling debacle and stock market sell-off last week).
4.  The main stock market sentiment indicators showed an increase in bullish sentiment last week. This is considered a “contra” indicator. After the recent stock market beating, there seems to be more complacency than fear in the markets. Folks are still in “buy the dip” mode. They might have buyer’s remorse if they’re short-term holders.
5.  The kind of technical damage to the markets caused by last week’s sell-off takes weeks, if not months, to repair.  After-shocks and re-tests of lows are the norm after such a severe sell-off.
The positives that point to a better economic environment and stock market include a better than expected weekly jobs report last week, improved July retail sales figures, good corporate insider buying, and more big corporate mergers announced today.
 
While I believe that the markets could bounce for a few more days, unfortunately, I feel that we are headed lower over the short-term. The S&P 500 index closed at 1204 today, and we may even climb as high as 1240-1260 before the markets “roll over”.  That is 3-4% from here, and it’s only an educated guess on my part since 1250 is approximately where the markets fell apart.  I’d like to take advantage of this short-term rise, but only if more volume confirms the move higher.  Otherwise, it’s easy to get whip-sawed in this low volume environment. 
 
This is why I continue to hold onto hedges and have refrained from putting available cash to work at this point.  I’ve continued to selectively cull positions and rebalance accounts to take advantage of the recent strength in the market. Nonetheless, we remain heavily weighted long in the equity and bond markets despite our cash and hedges.  If the S&P 500 index closes above 1290 convincingly, then I’ll re-evaluate my stance, consider pulling in my hedges and invest more cash.
 
But aren’t we investing for the long term? Why should short-term market dynamics control our investing decisions? While we do invest for the long term, it’s prudent to protect capital when the market is in a well-defined downtrend, especially when a near-term recession is a possibility, albeit a remote one.  Markets around the world are factoring in a global slowdown, and the U.S. won’t be immune.  Sure central banks may pull a rabbit out of their hat and stimulate the economy and markets once again, and I’ll be ready for that.  But for right now, unless I see some institutional “power” behind this rally, I just don’t trust it.  As I’ve mentioned before, I expect near-term market weakness until sometime in October.
 
No part of this message should be considered a recommendation to buy or sell any securities, and you should not act on this without consultation with your financial planner or money manager (better yet, talk to us!)  My position will change if the facts change, so I am not married to this position. That could be tomorrow, next week or next month. I don’t have a crystal ball, so my prognostication should not be taken as true fact (I could change my mind or worse, be wrong!)
 
Please let me know if you have any questions, concerns or feedback. I’d love to hear what you’re thinking.

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