Weekly Wisdom – October 19, 2023

By Hightower Great Lakes on October 19, 2023

Investment Solutions Fireside

Over the past few days our team has been busy hosting the Hightower Investment Forum Conference in Huntington Beach, California. The conference covers all things markets – from macro and micro trends, to fixed income and private markets.

The conference opened with a panel discussion between Chief Investment Strategist Stephanie Link, Managing Director and Portfolio Manager Michael Shea and Head of Fixed Income and Senior Portfolio Manager Lee Majkrzak providing thoughts on current markets. While the three panelists all have unique ideas and positionings, they often come to the same conclusions.

For example, they all believe that the consumer is strong overall – which has been a consistent theme in this weekly commentary – and can be attributed to the strong labor market, higher wages and elevated levels of savings. Coincidently, the September retail sales numbers were released this week and came in well above expectations at 0.7% versus the 0.3% expectation.   

Both Lee and Mike agreed that in markets like these, you must be willing to take what the market gives you. Whether that be looking into beaten up consumer staples stocks or locking in a valuable yield on a municipal bond, this ideology is focused on finding the best value now.

This is a core principle of our team’s investment strategy. Stephanie highlighted her favorite sector, industrials, following the $2 trillion in infrastructure fiscal policies put in place and the long-term onshoring theme. Within technology, she continues to like the cybersecurity and AI themes. 

There was some debate on whether or not the market has broadened out since the very narrow outperformance within megacap tech earlier in the year. The panelists agreed that there are green shoots in other sectors like energy and industrials.

While the S&P 500 is up 13.8% year-to-date, diving deeper into the allocation reveals that the equal weight S&P 500 is only up 1.94% year-to-date. The difference between these two figures comes from 7 different stocks, which many have nicknamed the ‘Magnificent 7.’ The likes of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA) and Meta Platforms (META) have returned 92% this year on average.[1]

Macro-Economic Fireside

Stephanie Link also hosted a macro-economic fireside chat with Neil Dutta, Head of Economic Research at Renaissance Macro Research with a focus on the U.S. economy. Neil and Stephanie spoke in-depth about consumer strength, economic growth, stimulus and the federal reserve.

While both of them expressed optimism on the economic growth that has taken place in the U.S. this year, Neil seemed to be more surprised by the growth than Stephanie. Considering that the U.S. consumer represents over 70% of U.S. GDP, much of the economic strength has stemmed from the consumer and continued wage growth.

With Neil’s heavy focus on the U.S. economy, he discussed how both state and local governments remain flush with cash and ready to spend. The idea of continued stimulus could promote another wave of economic growth in the U.S.; especially considering that the U.S. economy is short on housing, cars and planes – which Neil believes is not a recipe for a recession.

Beneath the Surface: Leading Market Indicators

Michael Shea and Warren Pies, Founder and Strategist of 3Fourteen Research, dug into leading market indicators and how to make sense of them. The discussion highlighted Warren’s asset allocation for the modern financial world. Warren shared that he started his career as an attorney, which has allowed him to have a fresh perspective on financial markets.

The traditional asset allocation of a 60% weighting of stocks versus a 40% weighting in bonds within a portfolio may not be the best option for this day and age. Typically, the equity allocation within a portfolio was the risk driver, whereas bonds were the cushions when equity markets acted in a tumultuous fashion.

Now, bonds are the risk drivers and equities may be acting as the downside protections. From 1960 to 1997, bonds were up 25 of the 100 worst days in the stock market. On the other hand, from 1998 to 2021, bonds were up on 83 of the worst 100 days in the stock market. These datapoints show the evolving relationship between the two types of assets.

Some of the key events that made the period following 1997 a significant turning point in financial markets include the Asian financial crisis in 1997, followed by China joining the WTO in 2001 and, finally, the beginning of the U.S. shale revolution in 2008. Warren proposed that energy should be a key component of one’s asset allocation that could protect against things like a recession.

This sector has roughly a 5% weighting in the S&P 500 which causes it to be more or less overlooked within equity allocations. Therefore, the energy sector has recently tended to have a low correlation with the rest of the market. Finally, Warren highlighted the importance of meticulously maintaining a strategic asset allocation opposed to just rebalancing quarterly.

Mastering the Curve: Unveiling Bond Strategies in an Inverted Yield World

Lee Majkrzak led a fixed income panel with Paul McGinn, Senior Vice President, Fixed Income Strategy at First Trust, Michael Denlinger Managing Director and Portfolio Manager/Trader at New York Life and Kewjin Yuoh, Partner and Portfolio Manager at Lord Abbett. The conversation focused on the yield curve inversion and how the market becomes un-inverted, where the best opportunities exist and the government deficit.

The conversation started off on a bleaker note, with a reflection on historic outcomes of yield inversions. That outcome is almost always a recession, which some on the panel believed will occur in the coming months. Despite some of the negative viewpoints expressed, opportunities exist within fixed income.

The top pick held by two of the panelists was a barbell municipal bond strategy, while the third member looked to capitalize on the yield curve volatility and buy AAA-rated asset-backed securities. To end the panel, speakers gave expectations for where the 10-year yield will be a year from today; answers ranged from 4.75 to 5.25 basis points.

Artificial Intelligence Horizons: Exploring Today and Charting Tomorrow

The second of four afternoon sessions focused on the hot-button topic Artificial Intelligence (AI). Stephanie Link led the discussion with panelists Dan Ives, Managing Director, Equity Research at Wedbush Securities, and Dani Fava, Group Head of Product Innovation at Envestnet.

Although AI has been around since 1957, excitement only skyrocketed this year due to advancements in technology. OpenAI’s introduction of ChatGPT was the turning point for AI. However, consumer-facing AI is not likely where enterprises will earn the real return.

Dan Ives came with facts to back up his AI claims, including that each dollar spent at Microsoft on its Azure Cloud results in $0.35 in AI spend. While AI offers many pros, concerns such as model bias, government regulation and security breaches present obstacles that may slow down the adoption of the technology.

Unlocking Value: Strategies and Themes for Long-Term Growth

Mike Shea hosted Ken Kuhrt, Executive Vice President and Portfolio Manager at Ariel Investments, for a fireside chat discussing strategies for long-term growth. The chemistry between Mike and Ken was apparent on stage, as both portfolio managers seem to have a value prerogative.

Ken gave an overview of his investment strategy, where his team focuses on 3-5-year investment horizons on companies that offer stable balance sheets as well as sound management teams. One of the key tenets that Ariel stands by is developing a close relationship with each company’s management team.

This promotes a stronger understanding of the operation, and the chance to understand how a management team thinks. However, just because the Ariel team knows a management team well does not necessarily mean it has invested in the company.

Ariel often gets to know a company so that in the event a stock becomes attractive from a value standpoint, it has a strong understanding of how the company operates and can invest at a moment’s notice. Some of the most compelling ideas discussed on stage were within industrials and consumer discretionary companies.

Investing Wisely in Energy Infrastructure

Brad Olsen, Co-Founding Partner and Portfolio Manager at Recurrent Advisors, provided a keynote around investing wisely in energy infrastructure. This presentation echoed some of the same themes highlighted by Warren Pies, mainly that energy exposure is a crucial part of asset allocation. Specifically, Brad focused on the energy infrastructure subsector within the broader energy.

A key investor concern that Brad brought to light regarding energy infrastructure investing is the perceived stranded asset risk. In other words, some investors view fossil fuels as a dying industry as renewables continue to ramp up. This stranded asset risk argument can be disproven when one looks at the energy situation in Norway, where 90% of new vehicles sold are all electric, and as a result gasoline demand has fallen 60%.

During this same period crude oil demand has not budged. Crude oil demand did not fall like gasoline due to the petrochemical industry and continued usage of heavier distillate fuels like diesel and jet fuel. Also, due to the increased electricity usage, natural gas demand in Norway surged 21%. Therefore, there will still be plenty of LNG and crude oil flowing through these pipelines.

Another important part to the energy infrastructure story is how energy has changed its funding source in recent years. During the years surrounding the shale boom, energy companies were primarily funded externally. Since this external funding came easily from Wall Street, energy companies took on a significant amount of debt and made rapid investments.

These energy companies are now funding themselves. This self-funding has materialized in much lower debt levels, a lower correlation with the overall market, as well as more meticulous investing and spending.

This capital discipline and strengthened balance sheets have caused earnings yields to rise significantly and rival investment-grade bonds. Overall, this exposure to energy infrastructure can be seen as a sort of call option for bad policymaking and/or geopolitical turmoil.

Click here to read last week’s Weekly Wisdom (10/11).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: CNBC. As of October 6, 2023.