Wright Cove Capital: October 2023

October 2023

When summer began, we wrote about the uncertain outlook many on Wall Street had about the near-term direction of the market. Conventional wisdom was equally split between both bulls and bears.  The bull-market thesis focused on inflation beginning to subside, leading to bets that interest rates would soon be cut, and hope that the Artificial Intelligence (AI) boom would be the catalyst to new market highs.  The bears contended that inflation would remain stubbornly elevated, leading to interest rates staying higher for longer, thus slowing investment as both consumer and corporate borrowing costs continued to be restrictive.

After three short (and mostly rainy) months neither side appears to have won. The S&P 500 continued its strong run from the first half of 2023 and rallied an additional 5% to begin the summer as the market began pricing in interest rate cuts to begin in early 2024. However, as the data began to disappoint mid-summer, the stock market sold off 6% to end the summer virtually unchanged for the season.  Since the end of the summer, volatility has increased, and the market has sold off an additional 3% as “higher for longer” is beginning to set it.

Like a broken record, we continue to emphasize that trying to predict and time short-term market moves is impossible. Computers and algorithmic trading programs now account for most daily trades and the data shows that those who think they have the upper hand are fighting a losing battle.  Heading into the last quarter of 2023 our general investment thesis remains intact and we continue to be excited about the opportunities in both stocks and bonds that lie ahead.

In equities we remain overweight “quality” stocks – those with strong balance sheets and stable earnings growth – that have, and we believe will continue to outperform weaker companies as the effects of higher interest rates continue to be felt throughout the economy. For those with a higher risk tolerance and a longer time horizon, companies with next generation technologies (think Tesla, Nvidia, Apple*) have sold off 15-20% or more from recent highs (following the AI euphoria of early summer) and now may offer a better entry point for those willing to endure increased volatility.

*We mention individual companies only as proxies and not as recommendations – while we are comfortable holding individual stocks for long term investors when appropriate, the data shows that exposure to the broad market or sectors is generally more effective – as demonstrated in a recent article from Bloomberg:

 “Only one actively managed stock mutual fund in the US has managed to outperform the Nasdaq Invesco QQQ Trust Series 1 (ticker QQQ) over the past five, 10 and 15 years, a Bloomberg Intelligence analysis by David Cohne found. It did so thanks largely to a heavy concentration in Tesla.”  https://www.bloomberg.com/news/articles/2023-09-05/bubble-hunter-rob-arnott-sees-a-big-market-delusion-in-nvidia.

In fixed income, as the broader bond market is heading for its third straight year of losses, we remain well-positioned in the front-end of the yield curve. With “risk free” returns on treasury bills now at 5.5% and yields on 2yr notes north of 5%, conservative investors and those with short-term liquidity needs are currently able to achieve returns that have not been available in nearly 20 years. We believe there will be a tremendous opportunity to take advantage of higher interest rates in fixed income by adding to duration and locking in higher yields, but until we see the data improve, the risk/reward to fight the Fed has proven to be a losing battle.

The more things change, the more they appear to stay the same…

The headlines are once again filled with stories of government shutdowns, labor strikes and geo-political dangers lurking in all corners of the world. The markets are back to pricing in “higher for longer” on interest rates and what appears to be a never-ending presidential election/impeachment cycle is about to heat up even more in the coming months.  Headlines can be scary, and the rabbit-holes that social media and cable news networks can lead one down magnifies these events even more.

Our job is to sift through what is news, what is theory, and what is just click bait. We strive to develop and execute client-specific investment plans – based on history, data, and analysis – to achieve the greatest return per unit of risk. What is appropriate for one may not be a good fit for another.

If the sell-off and volatility in stocks these past few weeks has made you uneasy, now is a great time to revisit risk tolerances and both long and short-term goals as we head into the last quarter of the year.

Conversely, if you were looking for an entry point into more aggressive sectors and strategies, taking advantage of market volatility can be an excellent way to add to long term positions. We continue to have more discussions with clients about opportunities in alternative investments. From private real estate funds, commodities and credit funds, and macro hedge funds, there are numerous strategies that may help diversify portfolios and potentially add alpha or reduce volatility for our high-net-worth clients.

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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