April 24, 2024

EWA Stock Market and Portfolio Review Q2 2024

This blog takes an in-depth look at EWA’s recent quarterly investment report and offers a detailed analysis of the complexities of the current financial landscape, including market trends, strategic portfolio management, and anticipated future movements. The aim is to provide investors with an understanding of how these insights align with goals for a financial independence, security and stress-free life by design.


Investment Philosophy

EWA’s investment approach and philosophy are designed to ensure that portfolios not only support a stress-free life, but also foster growth needed to meet future goals. This overarching investment philosophy and individual holding decisions shape the current and future investment portfolio and aim to align investments closely with both market conditions and individual investor goals.

Looking ahead to the second quarter of 2024, EWA has adjusted its strategy to capitalize on robust earnings and favorable market conditions, notably increasing its allocation to stocks and enhancing active risk. Emphasis is placed on the differentiation within the S&P growth and value funds, choosing to favor growth and quality in the current economic cycle. Furthermore, strategic enhancements will be implemented including actively managed exposures in international and fixed income spaces, addressing global political shifts and potential upcoming interest rate changes. These adjustments underscore a proactive approach in navigating complex market dynamics and ongoing commitment to adapting strategies that meet evolving market conditions and investor needs.


The Fed and The Markets

In January, financial markets were characterized by significant uncertainty, primarily due to evolving Federal Reserve (Fed) policy expectations. Initially, investors were braced for up to seven interest rate cuts throughout 2024, but the Fed’s economic projections, updated in December, scaled this back to just three cuts. This disparity between earlier market predictions and the Fed’s more conservative stance necessitated adjustments in market expectations, which likely contributed to increased volatility in equity prices across both medium and long-term horizons. As the year began, market sentiment began to align more closely with the Fed’s revised outlook, moderating expectations to fewer rate cuts, maybe starting around June. This recalibration reflects a broader trend of growing uncertainty and a shifting narrative among economic forecasters, some of whom now speculate that there may be no rate cuts at all in 2024.

Despite the rocky adjustment to these expectations, the long-term economic outlook remains optimistic. The potential rate cuts are strategic, aimed not at countering economic weakness but at managing a downward trend in inflation to ensure it aligns with broader economic stability before loosening monetary policy. The timing of these adjustments is critical given the lagging effect of monetary policy; initiating rate cuts before inflation firmly hits the 2% target can preemptively temper real interest rate increases, thereby avoiding an undue tightening of monetary conditions. By mid-year, it is market expectations may begin to more closely reflect the Fed’s projections, and confidence may grow in making more aggressive investment moves, banking on a more favorable economic climate fostered by a balanced and proactive Fed policy aimed at maintaining economic stability as inflation levels off.


The Labor Market

When the COVID-19 pandemic began in 2020, it triggered not only a public health crisis but also profound economic shifts, notably the phenomenon known as the “Great Resignation.” Unlike typical recessions marked by forced layoffs, this period saw a large number of individuals voluntarily leaving the workforce. This was evident across various demographics, including younger workers and early retirees. The massive influx of stimulus funds during the pandemic empowered workers, shifting bargaining power significantly towards employees. This shift forced companies to attract and retain talent by offering substantially higher wages than before, as evidenced by the notable increase in salaries for roles like nursing, where demand far outpaced supply.

As the initial impact of the pandemic waned, a shift in labor dynamics began to emerge. Quit rates, which had been high during the peak of the Great Resignation, started to decrease. This decline indicated that workers were becoming less confident in finding better or equivalent job opportunities, which in turn allowed companies to regain more control in wage negotiations. This stabilization is crucial for businesses as it provides more certainty in financial forecasting and strategic planning, ultimately impacting corporate profits and influencing stock market dynamics. The power shift back to employers suggests a normalization of wage increases, which could help temper inflationary pressures that have been exacerbated by previously high wage demands.

Current labor market data reflect these changes, showing a healthy slowdown in job growth which supports a potential soft landing for the economy. February’s job numbers, for example, indicated robust job additions but also a slowing pace of wage increases, suggesting a cooling off from the intense labor market heat of the previous months. This slowdown is viewed positively by economists and policymakers, as it could help stabilize inflation without triggering a sharp economic downturn. Furthermore, the correlation between decreasing quit rates and wage growth suggests that as employees feel less empowered to leave their jobs, wage inflation could further moderate, aiding in overall economic stabilization. This dynamic, while challenging for workers seeking higher pay, plays a crucial role in achieving a balanced economic environment conducive to sustained growth.



A detailed analysis of the Consumer Price Index (CPI) reveals that more than half of its 144 components currently register inflation rates below the Federal Reserve’s target of 2%. This observation suggests a shift back towards the more balanced inflation dynamics seen before the pandemic, indicating that the overall inflationary pressure within the economy is moderating. This trend, if it continues, could help the economy approach the Fed’s elusive 2% inflation target more closely. Despite this positive development, the market did not price in rate cuts for March, leaving six Fed meetings for the year, three of which will include updates to the economic projections (“dot plot”). The expectation is that any future rate cuts will be contingent on continued signs of disinflation.

Globally, the disinflationary trend mirrors that of the United States. By comparing average core inflation measures from the US, EU, UK, and Japan, each weighted equally, it’s evident that global core inflation has significantly decreased since peaking at over 6% in May 2023. By January 2024, this figure had approached closer to the 2% target. This global perspective is underpinned by the fact that the US led the disinflationary trend with its CPI peaking in June 2022, followed by the Eurozone and the UK in September 2022. Subsequently, these regions’ central banks initiated aggressive rate hiking campaigns over an 18-month period, illustrating a coordinated effort to temper inflation while balancing economic growth and employment.

Despite these positive signs of global disinflation, some challenges remain. Core services prices continue to be stubbornly high, and labor markets across major economies are still tight, complicating the task of central banks as they strive to balance their dual mandate of stabilizing prices and maximizing employment. Moreover, the impact of monetary policy decisions typically manifests after a lag of about twelve to eighteen months, adding another layer of complexity to policy planning and execution. However, the evidence of a global disinflationary trend supports the possibility of achieving a “soft landing” for the economy—a scenario where inflation is controlled without triggering a severe economic downturn, both domestically and internationally.

The Technology and AI Sectors

The broad technology sector has experienced phenomenal performance, with Nvidia particularly surpassing already high earnings expectations. The company’s fourth-quarter earnings, revenue, and stock price have all significantly exceeded forecasts, with earnings and stock prices tripling over the past year, pushing the company’s market cap to over $1 trillion. This surge is attributed to substantial upward revisions in earnings forecasts, suggesting a strong belief in continued growth and profitability, particularly as these companies ride the wave of AI development and integration.

Additionally, AI-focused companies like Microsoft, Meta, Google, and Amazon, are expected to continue investing heavily in data centers and R&D, driving further growth and diversification of revenue streams. This sector’s robust performance has significantly outpaced the overall S&P 500, with tech giants collectively known as the ‘Magnificent Seven’ dramatically outperforming other sectors. Despite concerns about a potential tech bubble similar to the late 1990s, current valuations and the reinvestment of cash flows into growth suggest a more sustainable trajectory. Currently, tech stocks trade at a higher price-to-earnings (P/E) multiple compared to the rest of the S&P 500 (28 versus 21). However, when comparing the tech sector’s aggregate forward P/E ratio to its ten-year trailing average, it aligns closely, suggesting that the current pricing isn’t indicative of a bubble. The investment strategy, therefore, looks to increase exposure to technology through specific ETFs like IYW (iShares U.S. Technology ETF) and SOXX (iShares Semiconductor ETF), leveraging the sector’s ongoing innovation and growth potential. This approach reflects a strategic response to evolving market conditions and underlying economic indicators, ensuring alignment with both current opportunities and potential future shifts.





Portfolio Adjustments for Quarter 2

Looking forward, investors will see significant shifts in investment strategies and the establishment of guardrails for future quarters. Now included is a limit on allocation deviations between equities and bonds, set at a maximum of 5%, with the current portfolio leaning 3% heavier towards equities. The equity portion of the portfolio will now be structured with a two-thirds focus on U.S. investments and one-third international, translating to approximately 67% U.S.-based and 33% international holdings. This approach underscores a strategic emphasis on geographical diversification and is crucial for navigating different economic phases globally, including early, mid, late, and recessionary cycles. This strategy aims to maximize returns while managing downside risks through asset allocation and diversification. Importantly, this approach aims to avoid market timing or shifting to cash holdings abruptly; instead, the focus is on maintaining a diversified and well-allocated portfolio consistent with a life-by-design philosophy, ensuring each component of an investor’s balance sheet supports their overarching life goals.

Within the fixed income sector, managing bond duration is crucial, especially given the potential for significant price volatility due to interest rate fluctuations over long periods. The portfolio currently maintains a duration that fluctuates between five to six years, offering flexibility to adjust as needed without incurring losses, particularly for retired clients who might need access to short-term funds. The full video (link below) will delve into specific funds within the portfolio. This detailed strategy aims to leverage various market factors dynamically, aligning investment decisions with the prevailing economic climate and expected market trends, thereby strategically positioning the portfolio across different economic and life stages.

Take a Detailed Walkthrough of EWA’s New Portfolios, Click Here to Be Directed to the Quarterly Report Video.

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Important Disclosures:

Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you.  The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.

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