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Volume 13, Edition 10 | April 30 – May 3, 2024

Balancing Jedi Wisdom and Vulcan Logic

Doug Walters, CFA
Who do you want on your investment team? Pop culture has given us some good role models to consider as we think about constructing the ideal team to lead you through your wealth management journey.
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Contributed by Doug Walters, David Lemire, Max Berkovich, Eh Ka Paw

Stocks and bonds ended the week in positive territory. Hopefully, you were not tempted to Sell in May and go away!” The beginning of May is an important time for many of our team here at Strategic. It is May the Fourth, of course! If you are not a Star Wars fan, I apologize for what is about to come, but a few times a year, we can not resist.

A few years back, we wrote about investing like a Vulcan (yes, I know that is Star Trek, not Star Wars). With May the Fourth on my mind, I was thinking (as one does)… would I rather have a Vulcan or Jedi manage my investments?

As an evidence-based investor, the case for a logical Vulcan is clear. The most costly errors investors make are typically driven by emotion. For example, an investor might move a chunk of their investments to cash or bonds, fearing that the market might crash—only to watch the rally continue. Vanguard quantifies the benefit to portfolio returns of behavioral coaching to be 1-2% per year1. Those are huge numbers! A logical Vulcan will not make those emotional mistakes, so should capture those benefits for you.

And what about the Jedi? It’s not so obvious. Jedi live by a code and are trained to control their emotions. However, the movies are full of examples where those emotions do not remain in check. All is not lost for Jedi, though. They would make exceptional advisors. My ideal advisor is intelligent, operates with the highest morals, and has good intuition, identifying problems before they escalate. That screams Jedi. Best of all, a Jedi advisor can talk their clients out of making poor financial decisions:

(WITH A WAVE OF THE HAND)
“These are not the crypto ETFs you’re looking for.” or
“You do not want to market time by moving to cash.”
How does your advisory team compare to the pop culture dynamic duo of a Vulcan and a Jedi? For Strategic clients, I’d like to think we match up favorably. Thank you for indulging my nerdy, science-loving, and Vulcan-like side. I guess that is what you get with an evidence-based investor who values science over speculation. Enjoy the weekend, and may higher returns be with you!

1. Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha®

Headline of the Week

On Again, Off Again

The Fed once again held interest rates at their current multi-decade high, citing a pause in inflation’s path back to 2%. Nobody expected any change at this meeting, but this pause in taming inflation brought back the specter of another rate increase. Investors largely brushed aside those concerns, but the time frame for any rate cuts was pushed back. However, “data dependence” lurks, and the ultimate path will be determined by the economic evidence.

Speaking of data, this month’s employment report (which came out after the Fed meeting) offers an encouraging piece of evidence in the rate cut debate. After last week’s inflation and GDP news helped push stock markets lower for April, this report appears to be flipping the rate cut switch back to “on.” Depending on how you measure the economic news cycle, this report completes the most recent cycle, and all eyes shift to the next reading of CPI, PCE, and employment. The market and Fed will have another opportunity to assess all three reports ahead of the next Fed meeting in June.

The Week Ahead

The coming week will be a dud after a banner week of jobs data, earnings, and a Federal Reserve meeting. The United Kingdom will take center stage, and Disney’s earnings will be the lone marquee report on the calendar.

Keys to the Kingdom

While a rate cut is highly unlikely during the Bank of England meeting, the key to this meeting is future rate cut plans.

Governor Bailey has set the expectations for a summertime rate cut, but markets demand more refined guidance.

It will be a game of words; early indications have zeroed in on the words “extended period” referenced in the context of remaining restrictive in its monetary policy.

If Bailey removes that phrase from the statement, it will be a signal that the June cut is in the works. The current base case is August, however!

The U.K.’s early indications are that the economy fared much better in the first two months of the new year than in the back end of 2023. So, expectations are that when the first quarter’s Gross Domestic Product (GDP) is released, the economy will have snapped back into expansion.

While the outlook for the economy is improving, expectations are for just a tiny expansion of 0.3% for the quarter, but enough to exit a technical recession.

Looking for Goldi

Domestic news flow drastically slows after a big week of job reports and a Federal Reserve meeting.

The biggest economic release is slated to be the University of Michigan consumer sentiment index.

This report takes the pulse of the consumer after months of stubborn inflation to see if we can continue the Goldilocks narrative of resilient growth and cooling consumer prices.

After the central bank meeting’s quiet period ends, the various central bankers are unleashed on the public speaking circuit.

As each of the Federal Reserve officials speaks, investors are served up a porridge of conflicting opinions on inflation, the economy, and future rate moves.

Channeling the Force

Earnings season slows down after earnings from Apple and Amazon this past week. However, Warren Buffett’s “Woodstock for Capitalists” this weekend and earnings from Walt Disney Company will take up significant television time.

  • Berkshire Hathaway’s (BRKa, BRKb) annual meeting in Omaha, Nebraska, this weekend includes four hours and 45 minutes of shareholder questions aimed at the legendary investor and his top lieutenants.
  • Sadly, Buffett’s long-time business partner, Charlie Munger, will no longer take a seat on stage, as he passed away in November.
  • Investors will eagerly await disclosure of: how much, if any, of their own stock the company bought back, the stock Berkshire has been buying in secret during the back half of last year, the size of the company’s cash pile (previous report it was ~$167.6 billion), and of course the operations of its current businesses.
  • Disney’s (DIS) stock has had a spectacular start to the year. When it reports earnings on Tuesday, analysts expect the streaming service will add 4.7 million subscribers in the quarter, bringing the total to 155.6 million.
  • In related news, while it will not be in Disney’s numbers this quarter, expect viewership of the Star Wars franchise to spike this weekend in observance of Star Wars Day on Saturday.

For those celebrating… May the force be with you!

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.

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