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by Nathan White, CIO

Stocks continued their winnings ways to start the year. According to NDR, it was the best start since 2019 and the 14th best since 1926. This was an impressive performance after a strong end to 2024. Growth and large cap stocks, led by the artificial intelligence (AI) theme, started strong with value and other sectors rebounded later in the quarter. Bonds were the only asset class to see negative performance. After such a hot start we will at some point in the year have either moderation or a pullback. Therefore, I have updated the following risks for 2024:

Weakening economy:  The global economy continues to face headwinds as geopolitical tensions and supply chain disruptions persist. While diminished, concerns about a potential recession loom as economic growth forecasts are revised downward. The Federal Reserve’s cautious approach to monetary policy is aimed at achieving a soft landing, but uncertainties remain regarding the effectiveness of such measures amidst ongoing challenges.

Resurgent inflation: While inflationary pressures have eased slightly in the first quarter of 2024, underlying factors such as supply chain bottlenecks and rising energy and commodity prices continue to pose risks of resurgent inflation. The Federal Reserve is trying to remain vigilant in monitoring inflation dynamics and may need to reassess its stance on interest rates if inflationary pressures persist or escalate.

Political and geopolitical risks. The ever-increasing national debt and widening budget deficits remain significant concerns, with implications for long-term economic stability and fiscal sustainability. Despite calls for fiscal restraint, policymakers continue to grapple with addressing structural deficits and implementing measures to curb spending growth.

Being out of the market. The impressive start to the year reinforces this point. I stated last time that the market always tries to knock you out of the game with a never-ending tale of worries. Market participation remains crucial to navigate through volatile conditions and shifting economic landscapes. Staying invested and maintaining a diversified portfolio can help mitigate risks associated with market fluctuations and capitalize on potential opportunities for long-term wealth accumulation. I always urge investors to remain disciplined and focused on their long-term investment objectives, avoiding knee-jerk reactions to short-term market movements. Consistent and prudent investment strategies, coupled with a commitment to staying on the course, are essential for navigating through uncertain times and achieving financial goals.

In summary, the risks highlighted for 2024 underscore the importance of vigilance, adaptability, and resilience in managing investment portfolios amidst a challenging and dynamic market environment. As always, our continued monitoring of economic indicators, geopolitical developments, and central bank policies, along with disciplined investment strategies, help you navigate through uncertainties and capitalize on opportunities for long-term wealth creation.

Model Portfolio Performance and Positioning

All our main strategies outperformed their relevant benchmarks in the first three months of the year. Our overall equity allocations outperformed even with a small amount of dry powder in the form of short-term Treasuries to protect against and take advantage of weaknesses that fortunately did not unfold.

The Managed Income model was up about 1.5% for the quarter. The allocation remains extremely conservative to minimize volatility and reduce risk. This was better than long-term Treasury bonds (-3.26%) and the Barclays Aggregate Bond Index (-0.78%). Interest rates rose slightly in the first quarter. causing bond prices to fall. To start the year the markets were pricing in about six quarter point rate cuts (about 1.5%) by the Fed in 2024. Persistent inflation has put a damper on rate cut hopes with most now expecting around three quarter point rate cuts. Our bond exposure is still overweight in short term securities for protection and safety. As I mentioned last quarter, we are looking at potential changes as the year unfolds. We will be looking to gradually add longer term bonds on any weakness. The spread between safe securities and corporate and/or high yield fixed income remains narrow, making the latter less attractive. The market is hoping that inflation will not reignite, and the economic growth will remain strong, but threading this needle could be complicated. Managed Income will remain focused on protecting capital and will primarily only add risk when conditions get extreme (i.e., recessions).

Within our equity and growth strategies, the Liquidity Factor Strategy was up 6.8% for the quarter. This strategy uses a proprietary method to take advantage of pricing anomalies in stocks that are less liquid and relatively ignored by the market. The strategy is comprised of ten holdings that see little turnover. There was one holding change for the quarter by adding Bio-Rad Laboratories (Medical Devices). The primary exposures remain in the Consumer Cyclical and Healthcare sectors. The Relative Strength ETF Strategy was up about 3.3% for the quarter and used a small Treasury Bills position as a hedge to mitigate risks that fortunately did not materialize. The strategy remains allocated Small Caps and Treasury Bills at the current time.

Fundamental 20 was up 17% for the quarter. It was the top performing segment to start the year. This strategy focuses on highly profitable companies that have excellent value compared to their cash flows and/or net income. We look for companies that are using their capital efficiently to make money. We added six new names to the strategy in April: Columbia Sportswear (Apparel Manufacturing), DXC Technology (Information Technology Services), WK Kellog Co (Packaged Foods), Nutanix Inc (Infrastructure Software), Royalty Pharma PLC (Biotechnology) and SSR Mining Inc (Gold Mining).

The Fast Movers strategy was up 12.2% for the first quarter of the year. This is our most aggressive strategy that actively seeks high growth and therefore can experience regular large drawdowns. The strategy is now allocated to mostly technology and communication services positions. The strategy now holds seven technology, two communication services, one utility and one communication services positions. We added a position in DoorDash (Internet Content & Information) and increased our holdings of Advance Micro Devices (Semiconductors). For those wondering about our “AI” exposure, it comes primarily from our NVIDIA, AMD, Intel, Meta, and Adobe holdings. The top holdings for Fast Movers continue to be CrowdStrike and Zscaler (Infrastructure Software).

The Top Flight Model Portfolio was up 12.2% for the first quarter of the year. By way of comparison, this was better than all four of our relevant benchmarks:  S&P 500 (+10.6%), Small Caps (+5.2%), Dow Jones Industrials (+5.6) and the NASDAQ (+9.1%). Top Flight continues to be comprised of 25% Fast Movers, 40% Fundamental 20, 20% Liquidity Factor, and 15% ETF RS. Among our overall equity holdings, the top five performers for the first quarter were NVIDIA (+81%), Constellation Energy (+58%), Williams-Sonoma (+57%), Meta (+37%), and Marathon Petroleum (+33%). The worst performers were a mixed group Dropbox (-18%), Adobe (-15%), Atlassian Corp (-14%), Zscaler (-12%) and Intel Corp (-10%).