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Vizionary Quarterly Report Q2 2023

A quick reminder to you our clients - your quarterly reports are available and can be viewed through your Client Portal.

By Wayne Wagner Jr.

Markets and Reality Separating

We are at the stage of an economic cycle where advisors start doubting their eyes and brains, where a bit of frustration can set in and where short-term questions can poke their heads up about the long term plan and “are we on track?”.

While inflation grinds on far higher than the Fed wants; job creation is through the roof; prices are rising everywhere from stocks to housing to groceries – it’s easy to look at a diversified portfolio of high quality, “wide moat” stocks and bonds and wonder aloud “why aren’t we keeping up with the market” in performance and “are we still on track with our long-term goals?”

Please know that these are the exact same questions we ask ourselves every single day with every single client.

Often, we feel like a broken record calling for conservatism while the market indexes have jumped far quicker than portfolio values over the last 3-6 months, but our logic is based on the scope of data and wide evaluation of the markets. Here are a few data points we see:

Recognizing Heavy Market Concentration

Over 80% of the market’s gains this year are driven by the performance of 7-8 mega cap tech stocks. The indexes are up because they are substantially overweighted to these stocks. More diversified portfolios do not have 5, 7, 11% invested in each of a half dozen companies in the same industry. We own some of these 7-8 mega cap tech names, but we are underweight relative to the index because we own a diversified pool of stocks from many sectors, each stand out innovators in their own category.

What We Expect From the Fed

The Fed is likely not done raising rates and may not be until they break something. The Fed seems to be trying to curtail inflation by getting the unemployment rate to increase. However, the job environment typically is being driven by demographics and not by the business cycle.

Labor costs are through the roof for most companies because there are not enough experienced workers in the workforce and this supply/demand dynamic will continue to drive labor costs higher and keep unemployment low regardless of interest rates.

The Impact of Interest Rates

Rising rates are driving up the cost of borrowing – not just on new purchases or new debt for companies, but for hundreds of billions of dollars of outstanding debt. Since about 2019, companies have substantially increased the amount and percentage of their existing debt denominated as Floating Rate debt vs Fixed Rate debt. The rise in interest rates in 2022 is cutting directly into corporate earnings.

For example, if you are a corporation with $1B of floating rate debt outstanding and last year interest rates rose 4.5% on average. This year your interest payments on that debt have gone up by $45,000,000. That’s $45M coming straight off your profit line this year vs last year.

Watching Commercial Real Estate

We have talked about Commercial Real Estate Debt beginning to reset and turn over. I have seen reports showing that if banks had to mark their real estate bonds to market, many of the “too big to fail” banks would take losses of over 50% of their current equity value – and these figures are forecast to be worse in the Regional Banks.

Two Observations on Stock Prices

We are already seeing earnings for the S&P 500 as a whole turnover and trend downward. We anticipate stock prices will follow.

Most stocks are not UP this year. Most stocks are flat to down – but a few huge companies are up a lot and that is lifting the index values and appear to be giving a false sense of security for many watching the markets.

Please know we are very conscious of a few things:

  • While portfolios generally outperformed last year, year to date we are lagging the equity indexes like the S&P 500 and Nasdaq.
  • I feel like a broken record calling for diversification and conservatism even as the indexes have risen in the short term.
  • We question our investment theses all the time: Do we own the right companies? Should we align more with the “Index”? “Which Index” Where are the future opportunities found? Etc.

The fundamental data points of the market do not support index valuations where they are today.

A few examples include: Corporate profits, the state of the debt markets and the fact that most stocks are not “up” year to date, just a few stocks are up a LOT YTD. We have never called for owning NO stocks and we won’t call for owning ALL stocks. Today, we remain stoic and resolved that we own great quality companies who are solving complex problems and providing solutions to the marketplace in a wide variety of industries and sectors. We believe these companies will add value to their shareholders, our clients, over time and we will continue to rebalance, research, and replace names within the portfolio to benefit long-term stockholders.

 Meanwhile, we recognize that times like this can raise questions for you on any range of topics such as long-term strategy and even down to discussions about individual names within the portfolio.

Please know your questions are never too simple to ask and you are never an inconvenience to our day – please, ask your questions, let’s have the discussion about your long-term plans and the short-term implications of the recent portfolio performance.

We believe you are best served not by chasing a few high-flying companies within the market, not by over investing in equities when the market is irrationally high and not by abandoning long-term strategic planning in favor of short-term decision making. Rather, you are best served by owning great companies for long periods of time while having a plan to meet your cashflow needs during retirement and using our low-cost business model and strategy planning to manage costs and minimize taxes while you pursue your long-term goals.

Like fishing in rough seas, there are times the boat is on top of a wave and times when it is at the bottom of a wave –staring at waves doesn’t catch the fish. The fish are caught on the lines in the water below. Stick your head in the water below the waves and things are much calmer instantly. It’s easy to get seasick standing on the deck of a rocking boat – glue your eyes to the horizon, call us for an antacid conversation and let’s stay focused on the long-term goal of landing enough fish for you to live your life, reach your long-term goals and leave a legacy for your family and the organizations you care about. Thank you for your patience and the opportunity to serve your family. We are here to help you envision more.

Until next time.

Wayne Wagner Jr. for the entire team at Vizionary Wealth Management

Advisory services offered through WealthPlan Group, a DBA for WealthPlan Investment Management, a subsidiary Registered Investment Advisor of WealthPlan Group, LLC. WealthPlan Group, LLC is not a registered investment advisor, but is the holding company for WealthPlan Partners LLC and WealthPlan Investment Management, LLC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

The information in this communication applies solely to the intended audience and in no way amends, revokes, or otherwise alters the existing agreements and relationships between WPIM and its clients. This communication is not a binding offer, expressed or implied. WPIM undertakes no obligation to update or revise the information herein or in any referenced third-party resource due to new information, future events or circumstances, or otherwise.

WealthPlan Investment Management (“WPIM”) uses data compiled and/or prepared by third parties (“Third Party Data”) in the delivery of Licensed Research and Data. Third Party Data is not owned by WPIM and user may be required to obtain permission directly from third parties for further use of Third-Party Data and may be required to pay a fee depending on the use contemplated by the user.