Value Investing in Uncertain Economic Landscapes

Over the past three years, since the beginning of the Bull Market in October 2022, we've experienced three U.S. stock market corrections - the most recent in the first half of this year. While the stock market reflects emotional expectations about future profitability, it is not always the most reliable indicator of economic health. That's why we complement our analysis with insights from the bond market, particularly the U.S. Treasury yield curve.

Typically, the yield curve slopes upward, meaning longer-term investments offer higher interest rates - similar to bank CDs. However, rare inversions in the curve often signal economic pessimism. A year ago, in July, we saw such an inversion: 3-month Treasuries yielded over 5%, while 20-year Treasuries yielded just over 4%.

Today, the yield curve presents an even more unusual shape - a pronounced valley around the 3-year mark. This suggests investors are seeking protection over the next 2-5 years by purchasing 3-year Treasuries. While speculation abounds, this shape reflects a sentiment of economic uncertainty.

Uncertainty, however, does not equate to a bad stock market. As long-term investors, we embrace prudent opportunism. This is a time for smart, sometimes aggressive, discount shopping for investments. For example, UPS stock has dropped from over $200 in 2022 to $80 today, offering a dividend yield over 7% - a classic Value stock opportunity.

Since July 2024, we've focused on value strategies, increasing allocations to international and U.S. small-cap stocks. International stocks have already delivered strong returns this year, and small-cap stocks hold the highest return potential over the next five years.

While a recession is inevitable at some point, we currently judge it unlikely within the next 12 months. Two long-term risks concern us: the potential politicization of the Federal Reserve and the integration of cryptocurrency into our financial system. The Fed's independence has long provided stability, and its politicization could have serious consequences. Similarly, the growing crypto market - now approaching $4 trillion - poses systemic risks if adopted by institutions deemed too big to fail.

VWA remains committed to navigating these complexities with prudence and strategic foresight. Please contact our office at 805-603-4960 if you'd like to learn how Village Wealth Advisors can help you with your investment strategy.

"All opinions and estimates constitute Village Wealth Advisors’ judgment as of the date of this communication and are subject to change without notice. Village Wealth Advisors does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments."