It’s summertime, what better analogy to use than roller coasters and theme parks. Why a roller coaster? A roller coaster goes up, goes down, gets a little bumpy and has lots of twists and turns. Sound familiar, sounds like the stock market.
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It’s summertime, what better analogy to use than roller coasters and theme parks. Why a rollercoaster? A roller coaster goes up, goes down, gets a little bumpy, and has lots of twists and turns. Sound familiar, sounds like the stock market. After a big downturn in 2022, in which we saw a historic year of both stocks and bonds being down double digits. We have seen the markets rebound in the first half of 2023, with technology stocks leading the way. For the first six months it has been a slow, long ascent to the top. You can almost hear the clank of every notch higher as we continue to climb up-and-up. There is an old stock market expression called, “Climbing the Wall of Worry.”
In last quarter’s newsletter, we outlined some issues that led to the latest banking crisis. The biggest story was and continues to be the Federal Reserve and interest rates. We wrote a big part of the newsletter about “the law of unintended consequences” and how rising interest rates affected the banking system and led to the failures of banks like Silicon Valley Bank.
As we begin the second half of the year, all eyes (and eyes) are on the Federal Reserve as they have indicated more rate hikes before year-end. The critical focus for the Federal Reserve remains controlling inflation and ultimately lowering it to their target of 2%. Will that lead to a recession, or will the Fed be able to navigate a soft landing?
The first half of 2023 was shocking to say the least. The Nasdaq index led the way, up over 32% inthe first six months. The S&P 500 index had a great first half (unless compared to the Nasdaq) increasing a respectable 16.9%. Small cap stocks, as represented by the Russell 2000 index, was up over 8% and the Dow Jones Industrial Average index was the laggard, up only 4.9%
This market was led by technology, many of which did very poorly in 2022 and rebounded sharply to start this year. Nvidia was in the news as investors looked for a way to profit from Artificial Intelligence (AI), with the stock going up over 189%. We all heard about ChatGPT,Bard from Google and Bing from Microsoft. Almost every country in the world is discussing AI, how to legislate it or control it. Yet in the US, Congress does not understand it well enough yet and continues to be behind the curve in trying to catch up and figure out the risks and rewards to this new technology while corporate America continues to discuss it in every board room.
Other market leaders such as META, formerly known as Facebook, rebounded with an increase of over 138% as they focused more on AI than on the Metaverse. Apple was up almost 50%, Amazon over 50% and Microsoft over 40%.
This leads investors to ask themselves, should we get excited? Over the last few decades, many technology “game changers” have come and gone. Many are still in use, but not to the hype the media created. Who remembers how 3D printing was going to change everything, from printing everyday items to printing our food? One stock in particular, 3D Systems (DDD)took off like a rocket as everyone chased the sure-fire gains to come, before crashing back down to earth. More recently, we were headed to the Jetson-like future of autonomous driving vehicles, the ever-so-popular Blockchain, an as mentioned before, the Metaverse! Overall, we are fans of new technology, but cautious of investing in the early stages until we have more certainty of whose technology will survive and thrive.
Looking ahead, what concerns us? Much of the same and a few new things:
Over the years, Paragon has supplemented the traditional 60/40 portfolio, a portfolio consisting of stocks and bonds, with additional asset classes such as structured products, private credit, private real estate, and private equity. Historically, alternative investments have been less volatile than publicly traded securities so adding alternatives to a portfolio has reduced the overall volatility of the portfolio. In exchange for the lower volatility, an alternative investment is generally less liquid and, therefore not always appropriate for every client or account.
We discussed the tax consequences last newsletter, but we recently posted a chart on social media that I thought fit well with the discussion on lower volatility and typically higher returns in the private markets:
An asset with the highest return and the lowest risk (as measured by annualized volatility) would be located in the upper left-hand corner of the chart. Paragon researches and recommends a combination of asset classes that can be added to the traditional portfolio that have the potential to improve returns and reduce the risk of the overall portfolio. What is most glaring in the chart above is where the 60/40 portfolio sits on the risk/return spectrum. As evident in this chart, while the investor does give up some liquidity by investing in private markets, there are additional asset classes that can be added to an existing portfolio that have the potential to provide a combination of lower risk and better returns. Bottom line, Paragon continues to recommend and move more client assets into private investments such as StructuredProducts, Private Credit, Private Equity, and Private Real Estate.
Whether you feel as if you’ve outgrown your advisor or you just want a fresh perspective on portfolio strategies in our current market, our team of experts is here for you.
