Jan 2024 Recap & Portfolio Adjustments

5-7 minute read

Welcome back my friends and I hope your 2024 is off to a great start.

Since we made some portfolio adjustments and rebalanced everyone’s accounts this past week, this is going to be a longer video so buckle up.

Since many of the portfolio changes tie into January events, I’m going to save the that for the end to give them more context, but with the first month of the year in the rearview, let’s see how 2024 is shaping up.


US Markets & Events

After coming into the final week of the month with the S&P up 3.4%, J Powell’s comments that rates were remaining unchanged, and that it’s unlikely to see a rate cut in March, triggered a selloff the wiped out half the gains, but still up posted a 1.7% gain for the month.

While I’ve been saying for almost a year now that we weren’t expecting any rate cuts until mid-spring of 2024, it still baffles me that expectations of a rate cut at that meeting, or even March for that matter, were as high as they were.

Think about it, the year started off with unemployment staying flat, Core CPI rising by 0.3%, followed by Real GDP coming in at 3.3% for Q4, blowing away the 2% consensus estimate, and was capped off with the IMF raising both US & global growth forecasts for the year.

On top of that, through the end of the month almost half of the S&P had reported Q4 earnings, with over 70% posting higher earnings than the market anticipated, and many companies revised earnings guidance upward for the year, reinforcing the strength of the US economy.

I mean, come on guys, get real; the US economy is too good of shape right now to justify a rate cut when inflation hasn’t come back down to the Fed’s 2% target yet.

And while the Fed is still anticipating 3 rate cuts this year, as of the time of this recording the odds of a cut in March are at 19%, with a cut in May around 64%.

Okay enough of that for now, however I will circle back to it when I talk about the portfolio changes we made, and how that ties in.

In other market-related news, the SEC officially approved Bitcoin ETFs to be traded, shortly after their social media account was hacked and someone posted that it had already been approved, sending crypto prices on a roller coaster for the following week.

While we will monitor these to see if they make sense to add to the portfolios at some point, I think you all know my stance on crypto, so don’t hold your breath. More importantly, these are brand new products and that are invested in a market that’s open 24/7, making it ripe for potential problems, and a risk we’re not comfortable taking with clients money right now.

On the political front, Trump’s decisive wins in the Iowa and NH primaries all but guarantees a repeat of the 2020 election.


International News

Overseas, despite the temporary cease fires that we saw for a bit, tensions in the Middle East have risen and are now affecting shipping in the region due to the rebel-enforced shipping embargo, which won’t do any favors for global inflation, however we don’t expect it to have a material impact on the US at this time.

Adding fuel to the fire, a few days after 3 US troops were killed, and many others injured in a drone attack by IRGC-backed militants in Jordan, the US launched an airstrike on 85 militant targets and facilities in Syria and Iraq.

Between what’s going on in the Middle East and in Ukraine, it likely won’t bode well for the European economy.

Alright, now for the good stuff.


Portfolio Adjustments

After spending 20+ hours on due diligence and crowdsourcing portfolio positioning and outlooks from close to a dozen of the largest investment firms, including Vanguard, Blackrock, and JP Morgan to name a few, here’s an overview of the changes we made to your portfolios this past week.

First, given our outlook on interest rates hasn’t change, and was further reaffirmed by Powell’s comments and the economic data mentioned earlier, we are still happy with the adjustments we made to the bond portion of the portfolios at the end of October and are keeping that sleeve as is.

To recap those, we structured the bond portion of the portfolio to focus on short-term and long-term interest rates, which is referred to as a barbell strategy, making us nimble to adjust when rates start coming down without missing out on the higher short-term rates in the interim.

In December we also replaced the Structured Notes that matured with an RBC dual-directional note and a Barclays principal protected note.

In short, rather than receiving interest payments each month, these notes provide us with market participation while providing downside protection.

The PPN has 100% downside protection from the market for 2 years but caps any gains from the S&P at 18% over those 24 months. Pretty straightforward and we felt that this was a great alternative to buying more bonds, given our market outlook.

The Dual Directional note is a little different. It also has a 2-year duration, during which total gains are capped at 21%, however should the S&P finish down more than 20% at maturity, you’d only participate in losses beyond that; not the first 20%. What’s really cool about these though is that if the market is down, but not more than 20%, that loss turns into a gain in that same amount; hence the term “dual directional”.

While I’m happy to elaborate if you want to learn more, I’ll give you a quick example:

  • If the S&P is up 25% over those 24 months, you earn 21%
  • If it’s down 25%, you lose 5%
  • But if it’s down 15%, you earn 15%

The combination of those 2 notes generally account for anywhere from 5-20% of the portfolios, with the most aggressive clients having the least.

To reiterate though, we are still expecting 2024 to be another good year for stocks, however we’re not so sure about 2025 given where we’re at in the market cycle, the conflicts overseas, and the expectation of another controversial election.

The more material changes we made were to the international stock sleeve, where we reduced our exposure to emerging & developed markets even further, while concurrently replacing both of the developed market funds.

The funds we replaced those with not only have lower expenses, but also significantly reduce our exposure to both Europe and China, while increasing our exposure to Japan, which has a much more positive outlook.

Given everything that’s happening overseas, in addition to growing concerns of the likely impact on international relations and trade policies should Trump take back the White House, we don’t feel that the risk/reward trade-off made sense, especially in relation to the outlook for US stocks.

For the money we pulled from overseas, we reallocated that to a tech fund that invests in the largest US tech companies, allowing us to take advantage of their respective market dominances as well as the AI push, which is far from over.

Lastly, with the turmoil in the middle east and energy stocks still being undervalued, we increased our energy fund holding slightly for the time being.


Closing Comments

Finally, I’m happy to say that the changes we made last year led to us outperforming the index benchmarks and expect these, and future adjustments, to build off that momentum.

Okay that’s a wrap. If you want to talk more about those changes or anything else, we’re here for you.


See you next month.


Related Blogs