MAY 2024: Running Money
MAY 6, 2024
Core Portfolio - Equities:
The US Equity Market has been on a tear since Jerome Powell’s December ’23 press conference where he indicated a willingness to cut rates in 2024. As a result, US equity and other risk assets are having a good start to the year. 2024 is a reminder that the stock market is not the economy and US Equity returns are hard to predict. There is an assumed risk exposure by being in the market at all times and there is risk not being in the market at all. The YTD rally is an excellent example of the unpredictable nature of broad market moves. Inflation has not cooled, the economy is not terrible (higher for longer)….yet the market rips on expectations of lower rates and economic weakness.
The message is simple…assume a static amount of exposure to the US equity market and be disciplined to buy more on weakness. With money market funds paying about 5% risk free, it’s good to be patient versus greedy. WLA’s US Equity exposure currently includes broad large cap, mega cap, and large cap value via low-cost, passive ETFs.
Core Portfolio - Bonds:
For fixed income exposure, 2-Year Treasury yields bottomed in January at about 4.1%. Rates crossed the 5.0% level this past week and are currently about 4.8%. Be patient and reload the laddered bond portfolio when rates are near 5.0%. Buying individual bonds remains an important distinction for WLA. Bond Funds/ETFs are an inferior option: investors risk lower yields and duration/NAV volatility.
Satellite Portfolio: Energy, Utilities, Uranium, Commodities
For the Satellite portfolio WLA looks for opportunities that can offer some combination of the following: attractive yields, low correlation to the US equity market and idiosyncratic, attractive return potential.
Energy: The investment case is simple. We are living in a fossil fuel based global economy for a while longer. The sector is attractively valued, good fundamentals, high dividends, and stock buy backs are emerging. Oil prices are a short-term risk I am willing to manage through. Energy is also about 3% of the S&P500…well under represented.
Utilities: Long regarded as a fixed income surrogate, Utility stocks endured an ugly correction in October 2023 when rates peaked and I’ve been building a position ever since. Attractive yields, well managed balance sheets, semi-government regulated pricing = inflation defensive (utility rates only go up)…the USA is also under invested in power generation. We need more power.
Uranium: Meet the new clean power. ESG (solar, wind, etc) cannot even come close. Political and public opinion risk is declining, closed reactors are reopening, new reactors are being built. Uranium is also becoming scarce, there isn’t enough of it based on projected long-term demand. Congress is also banning the purchase of Uranium from the largest producer, Russia, which just adds to an already attractive case.
Metals and Mining: The thesis is related to domestic demand via government sponsored reshoring and infrastructure spending. Watching this with a small bit of interest.
(Based on risk tolerance, existing portfolio positions and the timing of accounts being funded under WLA’s investment authority, not every client account is exposed to every satellite investment example.)
Closing remarks: Inflation will continue as long as federal government spending remains unrestricted. Interest rates matter less…e.g., if you want to slow inflation, shut off govt spending. Spending is not slowing = Inflation will continue. Rates seemed capped for the moment… the consumer is getting exhausted and the cost of the federal debt is very high. US equity marches higher.
The Charts:
