Wright Cove Capital: January 2024

 

January 24th, 2024

When talking about markets and investing, one-size-fits-all advice seldom exists. We publish these updates to share our insights and be transparent in our thought process.

In years past we have focused on the Fed, inflation, and the potential dangers of rising interest rates. Two years ago, we preached about loading up on T-bills. While this wasn’t the most popular or exciting suggestion, since January 1st of 2022, short-term Treasuries are up over 6.5%, outperforming both the S&P 500 and the US Aggregate Bond market by 2% and 15% respectively.

No, we didn’t sell everything and move exclusively into T-bills, nor should these numbers serve as performance metrics of individual accounts. However, this theme was our primary narrative, or our “best idea,” and it proved to be a successful investing strategy.

Throughout 2023, we slowly changed course and shifted away from value stocks, which served as a ballast and weathered the storm of rising interest rates, to what we referred to as “quality growth stocks.”  We believed the Fed would hold rates higher for longer and wanted the safety of companies with both strong balance sheets AND strong growth prospects. While this might have been the correct call, the strength and velocity of the market rally in the 4th quarter of 2023 surprised most investors.

So where do we stand going forward? What’s our “best idea” for 2024?

Put simply, our best idea heading into 2024 is to remain calm. We actively avoid market timing and prefer to rely on data, valuations, and experience in an effort to achieve the greatest return per unit of risk. We strive to protect and grow clients’ assets in that order, not chase short-term euphoria in markets.

Over the past four years, we have experienced a global pandemic, multiple wars, two stock market drawdowns of 25% or more, the worst inflation in 40 years, and the worst year in the bond market since the US Aggregate Index was formed. Yet, the world keeps turning.

Dire headlines about current events can easily overwhelm investors. Rather than being paralyzed by fear, we strive to remain calm while looking forward and focusing on opportunities or inefficiencies in financial markets that can lead to positive returns. We try to balance the risk/reward of every investment we make, looking for that margin of safety where we don’t need everything to go as planned to succeed.

Which brings us back to the “everything rally” in the 4th quarter of 2023. Stocks and bonds both rallied as the market shifted on a dime from a world of restrictive Fed policy to the hopes of Fed easing and easing quicky, with up to six rate cuts in 2024 priced into the market. We agree that the tide is turning but are not willing to speculate on the timing and pace of rate cuts. Inflation is trending down, and the path of rates appears to be lower, but the last 1-2% of inflation tends to be very sticky, and we remain cautious on how fast the Fed will be to lower interest rates.

As we head into 2024, here are our thoughts on markets.

Will the Fed cut interest rates this year? Probably. Do we think they will cut as fast and furiously as the market is pricing?  Probably not.

We continue to believe the best place to be for long-term growth and returns is the US stock market. We remain over-weight large cap quality growth, but have slowly begun adding to healthcare, international sectors, and small/mid cap stocks to broaden exposures.

However, if we learned anything these past few years, it is that investing in equities is a long-term journey.  If one is not prepared for the volatile moves in markets, a more balanced portfolio with a mix of stocks, bonds and actively managed funds is preferable now that interest rates have stabilized and offer positive real returns.

In fixed income, we remain focused on the belly of the curve. We feel the best opportunities are in the 2-5yr sector where current yields are favorable, and if the Fed does cut more, there is opportunity of price appreciation.  As T-bills mature, we look to diversify fixed income exposure across government agency bonds, municipal bonds and potentially rotate back into REITs, preferred securities and actively managed strategies as the Fed’s path on interest rates becomes clearer.

Finally, one can still earn over 5% on cash and lock in rates ~4.5% for 2years with relatively little risk. While these rates are not as good as last year, they are still well above where interest rates have been for the better part of this century, and higher than the current inflation rate.

What works for one client may not be the right path for another. We continue to define our success by our ability to listen, understand and achieve each of our clients’ unique goals. As always, if you have any questions or concerns – or believe someone you know would benefit from working with Wright Cove Capital, please feel free to reach out.

Regards,

Eric and Cass

Eric Leinwand, Principal – Eric@wrightcovecapital.com

Cass Tokarski, Principal – Cass@wrightcovecapital.com

The themes and strategies that we speak about and the positioning we take in portfolios are all customizable to best reflect each of our clients’ own unique goals and should not be interpreted as general investment advice.


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