December Newsletter to Clients

Enjoy this month’s edition that features a review of November investment returns, an announcement of 2024 contribution guidelines by the IRS and an explanation of why we include international companies in our portfolios.

November was a month to remember for investors. The S&P 500 index of large, U.S. stocks rose 8.9% during the month and the Bloomberg U.S. Aggregate Bond index rose 4.9%. What a difference a year makes! At the risk of bringing up bad memories, 2022 was a horrible year for investors with the S&P 500 index of large, U.S. stocks dropping 18% and the U.S. Aggregate Bond index also falling almost 13% - a rare instance when both stocks and bonds fell dramatically in the same year.

Why the sudden rise in November? Because inflation appears to be dropping close to the Federal Reserve’s target of 2% per year – although we’re not there yet – and investors believe the Fed may be done hiking interest rates. Why is that important? For stocks, lower interest rates mean lower borrowing costs for companies and, for high-growth companies who expect greater earnings in the future, those earnings are worth more today when there are lower interest rates. For bonds, yields and interest rates are closely tied together so their prices fall when their yields rise and, like in November, their prices rise when their yields fall.

Now, when we dig deeper, a more complicated story emerges. The S&P 500 is really more like the Magnificent 7 and the Middling 493. Seven companies – Amazon, Apple, Google, Facebook, Microsoft, Nvidia and Tesla – make up 30% of the value of the entire index and, together, were responsible for all of the index’s positive return during 2023 until just a few weeks ago. In fact, Apple’s stock alone is worth more than the market capitalization of the entire Russell 2000 index of small stocks! Fortunately, we all own plenty of Apple through our mutual funds.

IRS Announces 2024 Contribution Limits

Each year the IRS adjusts the amounts we’re allowed to contribute to retirement plans. Here are a few of the limits for 2024:

• IRA  and Roth IRA contribution limit - $7,000
  • Add an additional $1,000 if 50 and over

• 401(k) contribution limit - $23,000 (this is the employee limit and does not include employer matches)
  • Add an additional $7,500 if 50 and over

• 403(b) and 457(b) limits - $23,000 (UK employees can max out both of these accounts. This does not include the UK match)
  • Add an additional $7,500 if 50 and over

As always, the rules can be complicated so please ask us for guidance if you need it.

Why we invest in international companies

Robert and I love to travel and, as many of you know through your own personal travel experience, there is a big world outside the U.S. and many innovative, profitable companies as well. While it’s tempting to think of the entire stock market as the S&P 500 because it gets talked about more than any other measurement, the universe of investment opportunities spreads far beyond our borders.

When thinking about investment opportunities the Price-Earnings ratio, P/E ratio for short, is a good way to measure relative value. Currently, the P/E ratio for the S&P 500 is just under 19. So, it costs $19 to purchase $1 of earnings of that index. Conversely, the MSCI EAFE index – an index measuring stocks outside the U.S. – has a P/E ratio of just less than 13. It costs $6 less to buy $1 of earnings through that collection of companies than through the U.S. large companies.

The primary vehicle we employ to purchase companies outside the U.S. is the mutual fund T. Rowe Price Overseas Fund (TROSX). The fund collectively owns over $21.8 billion of international companies primarily domiciled in Europe and Japan. Think Nestle, Siemens, Taiwan Semiconductor and Novartis, for starters. Over the last year the fund has returned 23.71%, although past results should not be taken as a prediction for future returns.

As diversifying a portfolio can help smooth out the investing ride, our exposure to companies outside the U.S. contributes to that at a value currently better than that of large, U.S. companies.

Ramsey Bova, Owner and President, CFP®

Thank you for your continuing confidence.