July Newsletter to Clients

Enjoy this month’s edition that features a review of investment returns year-to-date, an insight into what’s driving stock prices higher, a reminder why we don’t choose individual stocks for clients and a warning about how scammers are falsely claiming to be the IRS.

Despite a lingering war in Iran, other geopolitical risks, sticky inflation and a disappointing game by the U.S. men’s World Cup soccer team against Belgium, global stocks delivered strong second-quarter returns. What was particularly interesting – and positive news for the stock market as a whole – is the market’s returns weren’t driven by the so-called Magnificent Seven group of companies: Apple, Alphabet, Meta, Nvidia, Amazon, Microsoft and Tesla. In fact, the market rose despite those companies’ returns lagged the S&P 500. 

I talk about diversifying our portfolios in this newsletter often. Part of the reason we diversify is one never knows which asset class – type of investment – will perform well. For instance, small-cap stocks are leading the pack this year so far. For the quarter, that group rose more than 21%. Similarly, real estate as an investment category is outperforming the S&P 500 so far this year. Here are the returns of the major asset classes through June 30:

•    S&P 500 Index of large, U.S. companies – up 10.21% through June 30;
•    Russell 2000 Index of small, U.S. companies – up 22.57%;
•    S&P Global REIT Index of real estate companies – up 11.62%;
•    MSCI World Index of international companies – up 9.19%
•    U.S. Aggregate Bond Index – up 0.62%. 

Attempting to predict precisely what the markets will do in the short-term is a fool’s errand – if Warren Buffett says so, it must be true – but it’s natural to feel a little nervous as markets hit new record highs. The Wall Street Journal gave me comfort recently, however, when it reported that corporate profits were driving the rise in stock prices, not investor speculation. The net profit margin for companies in the S&P 500 rose to 14.8% in the 1st quarter. Net margin is a measure of the profit generated from every dollar of revenue. This marks the highest net margin since FactSet began tracking this metric in 2009. 

We are occasionally asked why we don’t pick individual stocks for clients’ portfolios and use mutual funds instead. The answer is two-fold: 1) Mutual funds create better diversification and help reduce client risk; 2) Individual stocks rarely outperform the market over time. A recent study by J.P. Morgan proves this second point. 

In an analysis of the Russell 3000 Index going back to 1980, more than 40% of companies experienced a catastrophic stock price loss, defined as a 70% decline in price from peak levels that is not recovered. Additionally, 66% of stocks underperformed the Russell 3000 Index and 42% experienced NEGATIVE absolute returns between 1980-2021. Investing in a mutual fund helps dilute these negative performers by spreading risks across hundreds of companies.  

Beware: There is a new version of scammers falsely claiming to represent the IRS. Short advice: If you receive a phone call, email or text that represents itself as being from the IRS, it is almost certainly fraudulent. The IRS communicates with taxpayers through regular mail. Unfortunately, scammers are now using regular mail as part of their efforts to steal, here’s how:

Beginning this year, the IRS has legitimately been requesting information on your personal bank account in order to issue refunds through direct deposit rather than by issuing checks. If there is a legitimate problem with your banking information, the IRS will mail a Form CP53E, asking you to update your information. Here is where scammers have improved. They are now mailing fraudulent versions that look legitimate and ask you to scan a QR code. Don’t! the IRS will not use a QR code. The letter also contains a 1-800 number – don’t call it. 

If you receive a letter like this, contact your tax preparer, your attorney, or us at Moneywatch to help confirm whether this communication is legitimate or not.  

Thank you for your continuing confidence.