First Quarter Newsletter

Responsible Guidance:  First Quarter 2024 Newsletter, April 2024

Reversion to the Mean

There have been numerous studies on the effects of providing rewards or punishments when training for specific skills. For some time, it was believed that rewarding was more effective than punishing. However, psychologist Daniel Kahneman had a revelation when studying the impact of praising or rewarding pilots who outperformed making a specific maneuver versus scolding or punishing those who did not do as well. The revelation came with follow-up studies that revealed that when no feedback was given (neither praise nor scolding), performance improved for those who underperformed the first maneuver or task, and performance deteriorated for those who outperformed the first time. What Kahneman observed was that performance reverted back to average (reversion to the mean) and that possibly the reward or punishment led to casual interpretations of why that happened but may not have caused the change in performance.  If you would like to learn more, Daniel Kahneman’s book Thinking, Fast and Slow may interest you.

Statisticians use the term “reversion to the mean” to describe the changes in random variables. If you have been a Baron client for some time or follow our educational material, you may know that we say that making investment predictions is exceedingly difficult, if not impossible. It is because we believe investment returns are random because they involve factors outside of investors control such as market volatility, geopolitical events, or company-specific developments.

As you read through the performance results of the indexes we cover in our newsletter, you may notice some slight hints of performance reverting to the mean. Some obvious observations include Real Estate going from the best performing in the fourth quarter of 2023, to one of only two indexes with negative performance in the first quarter. The natural resources index also has exhibited periods of heavy oscillation around long-term average performances. Can you identify any others as you read on?

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. There are popular benchmark indexes that provide perspectives about the performance of global investments.

For equities, we monitor the MSCI ACWI All Cap Index. This index represents equity investments across 23 developed and 24 emerging markets. The index was up 7.68% in the first quarter of 2024, as ongoing concerns about inflation, interest rates, and geopolitical risks were not enough to deter performance. After having a solid fourth quarter in 2023, the index has now been positive for two consecutive quarters.

For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies. It was down -2.42% in the first quarter as investors tried to balance interest rate impacts from ongoing economic growth, while inflation concerns remain.

U.S. Economy

Job data continues to be favorable, but inflation data did have surprises, with slightly higher than expected reports. The Fed is still considering rate cuts, but there are possible decenters starting to come out, given the inflation data and continued job growth.  For now, economic growth and job growth both continue, keeping fears of an immediate recession at bay.    

The Bureau of Economic Analysis (BEA) announced in its third estimate for the fourth quarter of 2023 that real Gross Domestic Product (GDP) increased at an annual rate of 3.4% (the full press release can be found at https://www.bea.gov). This was the sixth quarter in a row of positive economic growth.

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the first quarter of 2024) using an approach like the BEA. On April 10, 2024, the estimate for first quarter GDP from the Federal Reserve Bank of Atlanta was positive 2.4%. Note that this estimate is updated regularly and is subject to change. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow

Job growth remains strong. According to the Bureau of Labor Statistics (BLS), the U.S. gained 303,000 jobs for the month of March, and the unemployment rate remained below 4%, at 3.8%. BLS indicated job growth was notable in government, health care, and construction (full press release can be found at: https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, followed up the strong performance in the 4th quarter of 2023 with solid performance in the first quarter of 2024. The index was up 10.56% in the most recent quarter. Following last year’s performance, it continues to remain the best performing index in our newsletter. Energy, Financials, and Communication services were the top performing sectors in the index.

For technical analysts and trend followers, the index was above the 50-Day and 200-Day moving averages for the entire quarter.  

Dividing index components into growth and value, growth-focused stocks outperformed in the first quarter of 2024, as they did for all of 2023. Value did outperform in 2022, when most equity indexes were struggling.

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 5.78% in the first quarter. Non-developed, or emerging countries, measured by the MSCI EM index, was up 2.37% for the first three months.  

Stocks in countries outside of the U.S. underperformed the S&P 500 in the current quarter, as well as in 2023. The last time international stocks outperformed U.S stocks was 2022, and then 2017 prior to then.

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was down -0.78% in the first quarter. The index gauges the performance of investment-grade intermediate bonds. With inflation reporting higher than expectations in the U.S., bond investors are contemplating the Fed’s ability to stick with its rate-cut forecast and the possibility that rates may remain higher for longer.

The 10-year U.S.Treasury bond yield was higher at the end of the first quarter versus the beginning of the year. On March 28th (last business day of the quarter) the rate was 4.20% compared to 3.88% where it started the year.

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion, and fixed-income investors are compensated for taking longer-term risk. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty, and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

At the end of 2024’s first quarter, the 2-year was 4.59% (and 10-year 4.20% per above) keeping the yield curve inverted by 39 basis points (a basis point represents 1/100 of 1%). As a point of reference, the yield curve has basically been inverted since the third quarter of 2022, just after the Fed started raising rates in March of 2022 to fight inflation.

The yield curve steepened slightly in the first quarter after flattening during the previous two quarters. As the economy continues to grow, in spite of inflation surprises, the slight steepening in the recent quarter may indicate investors are thinking about a growing economy and higher rates for longer.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, struggled in the first quarter following its strong performance in the fourth quarter of last year. The index was down -1.30% for the first three months.

According to Freddie Mac (FM), the average 30-year residential home mortgage rate increased slightly to 6.88% (as of 4/11/2024). The current U.S. average weekly rate was roughly 6.92% (as of 4/11/2024). During the past 52 weeks, the rate has been between 6.35% and 7.79%.

Natural Resources

The Bloomberg Commodity Index (BCOM) rebounded in the first quarter, up 2.10% after being  the only negative performing index for the fourth quarter of those in our newsletter. Energy-related investments, along with cattle, and gold helped generate positive performance. Aluminum, agriculture, and natural gas were all detractors for the quarter.

Baron Client Strategies

Planning for multiple outcomes with Your Personal Economy^SM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are Registered Investment Advisors (Fiduciaries) and we operate as fee-only advisors, so we do not receive a commission for making investment transactions. A big reason your Baron team makes trades is to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy. Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions. We use this same approach with our own personal money.

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal Economy^sm

Concluding Comments

As we move further into the year, there may be many events that impact investment performance. It is important to understand that the best performing investments today may not be the best performing tomorrow. We believe investment returns are random and eventually will revert towards the mean. And because we do not know when that will happen, we believe that investing in a globally-diversified, risk-appropriate strategy, and planning for multiple outcomes, will help best position you within Your Personal Economy^SM.

Baron Updates  

We hope you enjoyed the Spring Training Baseball game in Sarasota! It was our pleasure to host the event and we enjoyed the opportunity to see so many of you! Please save the date for our next client appreciation event, Casino Night 2024, in New Jersey – October 24, 2024. Details to follow. We hope to see many of you there!

April is both Financial Literacy Month and Autism Awareness Month, and a good time to visit our website blog to read or view our educational content. Our recent post reminds everyone how we can help special needs families plan for today and for the future. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing.

Remember that you can also visit our website to gain access to your client portal. Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

Please contact us if you would like a copy of our current registration (ADV) with the Securities and Exchange Commission. You can contact our firm at 1-866-333-6659 or at gregoryc@baron-financial.com. You can also find our ADV through the Investment Adviser Public Disclosure system at www.adviserinfo.sec.gov.

We always like to share our good news! This quarter we happily share with you the arrival of  the newest member to our Baron Family, Jacob Paul Suazo, son of Maria and James Suazo, who was born on March 13, 2024. Congratulations to his loving parents and the entire Suazo clan!

Please let us know if you have any life changes that may affect your financial plan. And please share your good news - we are always happy to hear from you!

Warmest Regards,

Baron Financial Group, LLC
www.baron-financial.com

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 17, 2024, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.