Broker Check

Winter 2024 Investment Strategy Update

January 16, 2024

Happy New Year! 2023 turned out to be a good year for investment returns in the equity markets, with a strong finish in November and December of the final quarter. However, valuations are now stretched and stock markets have likely overshot fundamentals counting on Fed rate cuts and a soft economic landing that may not materialize in the New Year the market backdrop may not be as forgiving as in the past. Credit is tight, interest rates and geopolitical risks are high, and the consequences of a slower economy and allocation missteps may be more severe with the deteriorating global macro dynamics.

The first trading week of 2024 was lower for stocks and bonds followed by an up second week and volatility is expected to continue for a plethora of reasons. We allocate our valued client’s portfolios to meet their risk temperament and financial goals, but we need to be prepared to endure the volatility in the markets which is the price we pay for higher longer-term returns as trying to time the markets is extremely difficult. The good news is that the coming advances in technologies will enhance our lives and I highly recommend that clients frequently view the wealth of articles and videos that we update on www.castlefinancial.com with particular attention to the article that I posted on AI (Artificial Intelligence) in Finance under the “Resources” section. Our world is becoming digitized and I believe some of the best opportunities to build wealth will be in this new, exciting and evolving sector which effect many aspects of our lives.

For example, if you think stock prices rallied in 2023, just look at the market for digital assets where prices soared at dizzying rates last year. The leading crypto currency, Bitcoin, being touted as digital gold, was up around 69% from a rally that began in early October 2023 after tumbling in 2022 and then the best-known digital token doubled last year. Less familiar Bitcoin digital alternatives rose even more and shares in one crypto company, Coinbase Global, shot up a staggering 390% in 2023. On January 10th 2024, financial regulators allowed many Bitcoin ETFs to trade giving investors much easier access to Bitcoin via their brokerage accounts and I am sure others digital assets like Ethereum will follow. Unfortunately, what many individuals and companies have learned the hard way is that not embracing new technologies and innovations can be devastating as the “Amazon effect” on many industries has destroyed many legacy companies that have not embraced new technologies. Sears, for example, could have been Amazon if they exploited their catalog on the internet and executed the Jeff Bezos plan for Amazon.

In the digital space, Grayscale, BlackRock, Fidelity, Wisdom Tree, Ark Investment Management, Van Eck, and Invesco have or are in the process of launching Bitcoin exchange traded funds and other companies are set to follow. With respect to the largest crypto currency, the supply of new Bitcoin is also due to slow thanks to an upcoming “halving” event when every four years the algorithm that governs Bitcoin cuts the amount “miners” get paid to unlock new coins by half. Previous halvings have led to substantial moves higher in the crypto currency’s price. However, I am more of a believer in Ethereum which is a digital computer with its own operating system and recent and upcoming events lay the groundwork for exciting improvements in Ethereum's scalability, security, and sustainability. Ethereum is considered the internet of the crypto industry which aims to disrupt traditional financial and business services and I believe that ether is a play more on the world’s computer of the future. Further, I think Ethereum is the “digital rails” on which many new technologies will ride analogous to the steel rails that made Cornelius Vanderbilt extreme wealth building and owning many railroads in the USA. I believe that Ethereum will be a digital global rail phenomenon! Accordingly, we will continue to monitor this sector for investment opportunities for our valued clients.

Getting back to traditional markets, after four years of suffering from long-Covid, 2024 is lining up to be another volatile year for stocks and bonds. The massive disruptions and dislocations caused by the pandemic are gradually fading in the rearview mirror and I think it is time for investors to get back to basics. Expectations for Federal Reserve interest rate cuts resulted in a recent spike in bond prices, but the rally appears to be fading in the New Year and Fed rate cuts may not help stock prices to rally substantially higher going forward contrary to what some bulls in the media are forecasting. Looking at the charts going back to the 1970s, stocks initially moved higher on Fed interest rate pivots, but then dumped hard because the Fed typically flips to lowering interest rates as a result of economic conditions deteriorating and this recent pivot or reversal was on a dime which concerns me being a student of the history of the markets.

Accordingly, how things begin to play out in 2024 relating to expectations of rate cuts and lower inflation leading to a soft economic landing will ultimately decide whether markets hold and digest the Q4 2023 gains or give them back (and possibly more) as reality may not match “wishful” optimistic assumptions. FYI – Since WW2, the Fed has achieved a soft economic landing only once in the mid-1990s. Every other time the Fed embarked on a rate-increasing cycle, the economy has ultimately tanked after the rally. On the other hand, historical data shows that when a large percentage of S&P 500 companies hit twenty day highs, as recently observed, equities tend to rise in the following months. While this momentum signals market health and breadth, it is crucial to monitor for excessive exuberance, akin to speculative mania.

Understanding the state of the American labor market is one factor that is crucial for shaping investment strategies because America is, for the most part, a consumption driven economy and it will become more difficult for consumers to spend as job growth trends falter which is actually happening because some of the numbers that are being reported are somewhat misleading with part-time jobs being counted as full-time jobs decline. Also, employment is a “lagging indicator” so looking for trends that will weaken labor markets will be critically important as waiting for negative labor reports to make changes in investment portfolios will be too late as financial markets will react way in advance of declines in the labor markets. On that note, the Fed is jawboning the markets for a reduction of interest rates in anticipation of slower growth and declining inflation. Equity markets were partially driven in 2023 by firms riding the AI revolution, leading to high stock valuations in the U.S. coming into 2024. The initial AI hype appears to be baked into the markets and, unfortunately, geopolitical instability is breaking out seemingly everywhere and 2024 is an election year, so break out the popcorn. In a world of mixed signals, confusion and illogical market moves, investors are eager to find opportunities in an imperfect environment and rest assured we will not end our quest to find investments to build wealth for our valued clients.

Stocks still have the potential for a decent 2024, but it will need to come from the strength of company earnings and improving economics, which I fear are being hurt by the horrific leadership and policies coming out of Washington that are considered by some to be anti-business and anti-USA in some instances. Accordingly, I will continue to keep a close eye on various economic indicators and developments, both domestic and globally with two horrific wars now raging which are causing many problems for the world. We have provided clients with comprehensive macro reports from Capital Group with a bullish slant and from Global X by Mirae Asset which makes a strong case for a weak first half of 2024 followed by a rally in the markets into the end of the year and only time will tell how things play out as we are truly in unchartered waters in so many respects.

More Technological Developments in Energy

The 28th annual United Nations Climate Change Conference (COP28) discussed nuclear energy as a potential solution for clean energy. On December 1st 2023, twenty two countries including the US, Canada, the UK, and France pledged to triple nuclear power capacity by 2050 (from 2020 levels). However, COP28 has not made any final decisions regarding the pledge but did offer a new specific target to triple renewables and double energy efficiency by 2030. Of note, nuclear power does have drawbacks such as safety concerns (amplified from the Fukushima disaster in 2011), waste disposal challenges, high construction costs, and extended project timelines.

On a positive note, there have been improvements in recent years from new technologies in the space. These include small modular reactors (SMRs) and Generation IV reactors with passive safety systems for automatic shutdown during emergencies. Three SMRs were operational in 2022, and three more are under construction. More than 80 SMR designs are being developed around the world. The construction time of an SMR is estimated to be around three to five years, a material reduction from the previous average of seven to 10 years. The construction time for GE-Hitachi's BWRX-300 SMR is estimated to be between two to three years. Additionally, advancements in technology suggest a decrease in the estimated overnight capital costs of new nuclear plants by 2050. Nuclear energy, once seen as a less promising clean energy source, had been fairly stagnant for ten years. However, over the past year it has shown remarkable performance, outpacing other clean energy sources. The declaration of twenty two COP28 countries to triple the current capacity implies that nuclear energy could reach 1200 gigawatts by 2050. It also suggests the upward trend for nuclear energy is likely to continue in the short and medium term. As noted earlier, advancement in technologies are promising for the future and AI and quantum computing will accelerate progress which has broad implications for businesses, our planet and the human race.

Gold – After making new all-time highs around $2100 a troy ounce, gold appears to be consolidating for a move even higher as US deficits explode with reckless government spending and the US dollar potentially rolling-over with growing concerns of a currency debasement leading to a “financial reset” which we will be reading more about as US debt and deficits continue to sky rocket higher out of control. Accordingly, I expect gold to continue to trade inversely off the U.S. dollar and as long the dollar remains broadly under pressure the outlook for gold will remain positive. As I have stated many times in past updates, gold is the only true money of the ages, hence gold is an allocation in client portfolios as a store of value and form of insurance for a potential financial reset. Interesting that I have mentioned a potential coming “financial reset” in the past and now the term is being discussed more frequently in the news. I hope for all our sakes that I am wrong. . . . the direction of USA improves and the massive deficits start coming down. The US National Debt exceeds 34 trillion dollars ($264,000 per tax payer) and is screaming higher with total US Unfunded Liabilities exceeding 211 trillion dollars!  View www.usdebtclock.org for updated figures.

As always, we will remain “tactical” in our approach to managing money focusing on sector allocations and great security selections as markets and new technologies continue to evolve as bright hopes for our futures. We continue to send our valued clients timely updates, videos and newsletters via email, so please call our office if we do not have your current email address and also advise us of family, friends and co-workers who you feel will benefit by also receiving our timely and informative email updates.

We are truly living in challenging and unprecedented times to say the least and, as such, we should expect continued market volatility. However, it is important to remember that volatility has been with us throughout history, and volatile markets do not necessarily mean negative returns. Yes, risks remain to the markets and the economy, as they always do, but it is important to remember that a well-executed and diversified, long-term-focused financial plan can overcome bouts of even intense volatility as we have all witnessed in the past.

At Castle Financial, we understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even temporary bouts of volatility like we experienced during the height of the pandemic are unlikely to dramatically alter a diversified approach to meet your long-term investment goals. Therefore, it is critical for you to stay somewhat invested, remain patient, and stick to the plan, as we have worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.

Castle Financial has strategically partnered with some of the leading global money management firms in the world with tens of trillions of dollars under investment management and this quarter we have chosen to send clients  timely reports from two of our institutional strategic partners, Capital Group and Global X by Mirae Asset for additional insights into the global macro picture. Our current disclosure statement is set forth on the Firm Brochure Supplement of Form ADV and our Customer Relationship Summary (CRS) are available for your review upon request and on the Castle Financial website.

Please visit us at www.castlefinancial.com for a wealth of information and a plethora of great content on a myriad of financial topics and contact us with any questions, or to schedule a consultation.

         

Yours truly,

Al Procaccino II, MBA, CFF®, CFP™, CFS®, CDAA™

President & CEO