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Tuesday, May 21, 2024

Lucia Capital Group CEO on Equities, Tech Bubbles, CPI

Wealth Management Roundtable - Ray Lucia, Lucia Capital Group

Ray Lucia Jr.
Chairman & CEO
Lucia Capital Group

Is this still a good time to invest? Are we looking at a market top for equities?
It’s always a good time to have a plan. Through April 16, the S&P 500 Index (SPX) is up roughly 5.8%. That comes on the heels of a fantastic 26% year in 2023. Before the recent upswing started in October, the SPX had been essentially flat for almost two years (up 1.4% from Sept. 30, 2021 to Sept. 29, 2023). So, while the last six months may seem remarkable, it has merely taken us back to longer-term averages after a long consolidation. Finally, we are in an election year, usually a pretty good thing for markets. In 83% of the 23 election years since the S&P 500 Index began, the market provided positive returns. Further, since 1952, the S&P 500 Index has averaged a return of 12.5% in election years when a sitting president is running for reelection.

Is there a bubble forming within technology and artificial intelligence stocks?
Given the market leadership and general outperformance of the Magnificent Seven – a group of seven Big Tech companies that includes Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla – over the last 12-18 months and the excitement surrounding artificial intelligence (AI), we continue to hear comparisons to the dotcom bubble of 2000, for instance. But that was a very different time with internet companies without revenues like trading based solely upon web traffic and user engagement. Today’s tech giants have massive balance sheets, copious cash flows and huge competitive moats. Nivida, perhaps the poster child for current “excess” trades at a 34.7x Forward P/E while delivering $22.1 billion in revenue in its latest quarter up from $6.0 billion the year prior. Its Forward P/E is actually down substantially from 12 months ago (from 58.8x).

The latest CPI prints over the last three months have been hotter than expected – will stubborn inflation ultimately sink markets?
It has been demonstrated that a substantial portion of inflation that peaked around 9.1% in June of 2022 was indeed transitory. Further, we must acknowledge that the Fed has done a masterful job so far getting inflation down and holding expectations in check through successive rate increases during 2023. Largely, without much of a hiccup (save the Silicon Valley Bank crisis). That said, we always believed that the “last mile” — wringing out the final 1.0-1.5% to get back to the Fed’s 2% target — would be the biggest challenge. Historically, higher interest rates and a tighter money supply have had a lagging effect, and by the time the impact is visible in economic data and the Fed moves to cut, we may already be in a recession.

How should fixed income investors handle the volatility seen in bond markets to begin 2024?
In our estimation, the biggest surprise for most economists has been the resiliency of the U.S. economy. Most believed we would be in a recession by now and rates would have come down to jump start a weakened economy. This view fueled a bond rally to close out 2023 as market participants forecasted up to six rate cuts for 2024. However, because of the resilient economy, the Fed has been able to be patient, holding rates steady. As a result, projections for 2024 rate cuts dropped to two and bonds, as measured by the Bloomberg Aggregate Bond Index, have lost 3.4% year-to-date as of April 16 of this year. Even with uncertainty on when rate cuts will begin, historically bond investors have experienced positive outcomes when adding duration after a pause in rate increases even if they are early to the party for the tailwinds rate cuts will bring to fixed income portfolios.

Ray Lucia Jr. is the Chairman and CEO of Lucia Capital Group (LCG), guiding both the firm’s vision and its financial strategies. Anchored primarily by The Bucket Strategy, LCG has been helping individuals, families, and business owners manage their wealth for decades. Ray began his career at Deloitte and Touche as a tax accountant and has nearly 25 years in the financial services industry. He has since held roles as an investment advisor, executive VP, and CEO. Ray graduated from Loyola Marymount University with a B.S. in accounting, holds a CPA and a PFS designation from the AICPA, along with FINRA Series 7, 24, 63, 65, and a California insurance license.

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