Resources/Weekly Insights

Volume 13, Edition 10 | May 13 - May 17, 2024

Fear Not – Your Portfolio is Doing Exactly What it is Supposed to Do

Doug Walters, CFA

With stocks hitting all-time highs we take the opportunity to discuss FOMO and how to not let it derail your well-diversified portfolio.

Contributed by Doug Walters, David Lemire, , Max Berkovich

As the Chief Investment Officer, I often field questions from our Strategic community about the markets and their portfolios. They tend to come from two uniquely human mindsets: downside fear and fear of missing out (FOMO). We often talk about the downside. Perhaps, they read an article that the global order is about to collapse, or that stocks are too expensive. Media is designed to prey on this fear, and we are here to help talk them off the ledge. But today, with US stock markets hitting new highs, we will take the other side of the emotional spectrum and dive into FOMO.

The Allure of Winners

Wanting to be a part of something great is natural. We see investors fall prey to this in the extreme with meme stocks like GameStop which was up nearly 200% this past week before giving up nearly all those gains by Friday. Talk about a quick lesson in the perils of FOMO! But there is a more mundane side to FOMO that we see manifest amongst owners of well-diversified portfolios. The conversation goes something like this, “Why do I own small cap stocks (or anything else lagging) when large cap has performed some much better? Should we put all my money in large cap?”

It’s a common question, especially when the S&P 500 is having such a strong run. But good investing is not about chasing the ‘asset of the moment.’ It’s about building a diversified portfolio that can weather the ups and downs of the market over the long term and give you a return that is consistent with the risk that is right for you.

Much More Than Egg Storage

Diversification is THE fundamental concept in portfolio management. It is much more than not putting all your eggs in one basket (reducing risk); it’s also about making a higher profit when you sell your eggs! By spreading investments across a variety of assets—like emerging markets, developed international markets, and different sectors of the U.S. market—we can reduce the severity of the ups and downs of portfolio’s value and potentially enhance returns over time.

Well-constructed portfolios don’t always go up (despite how it may feel right now), and within those portfolios there will always be a best and worst performer. Currently, the US large cap happens to be one of the best performing assets. Next year, it could be emerging markets or value stocks or something else entirely. Owning a laggard in a diversified portfolio is not the downside of a diversified portfolio it is the advantage! The balance of winners and losers is precisely what smooths the ups and downs and create the opportunity within the portfolio to rebalance – systematically selling high and buying low. The holy grail of investing!

Diversified or Well-Diversified

While we discourage FOMO, we encourage investors to scrutinize their portfolios. There is a difference between a diversified portfolio and a well-diversified portfolio. Every piece of the portfolio should be intentional and justified. In our portfolios we look beyond simply large cap, small cap, and bonds. We want diversification in regions (including international), currencies, across economic cycles, and within factors (Quality, Value, Momentum and Size).

Evidence-based investors, like us, don’t lose sleep wishing somehow they could have predicted the future and only been invested in the highest performers. Instead, they sleep well, knowing they have a portfolio doing exactly what it is supposed to do – taking advantage of market dynamics and getting you where you need to be without taking excessive risk. A well-diversified portfolio is designed for the journey, not just the moment.

(with that said… let’s enjoy this moment, because amazing returns like investors have seen recently cannot be expected all the time!)

3.4%

Headline CPI Inflation

CPI inflation fell greater than expected to an annualized rate of 3.4%.

Headline of the Week

Phew – Glad That’s Over

A number of reports this week broke the recent trend regarding inflation’s path, boosting the prospects for rate cuts. The financial press is littered with articles chronicling inflation’s rapid descent from post-Pandemic supply issues only to grind to a halt to start this year. Brings to mind a great Yogi Berra-ism for the Fed’s fight against inflation – “it ain’t over till it’s over.” Or in this case, “it ain’t over till it’s 2%.”

While both headline and core inflation figures ticked lower on an annualized basis, things are still a bit murky under the covers. Housing seems to be particularly sticky and while housing’s influence on inflation works with a lag, this lag seems extreme even by its standard.

This tick lower, after a volatile April, reignited the everything rally. Stocks, bonds, gold, crypto and even utilities are all up significantly. The next major inflation report (the Fed’s preferred one), the Personal Consumption Expenditures, is due out at the end of the month ahead of the next Fed meeting. So, rate cut handicappers (not us) will have to wait to see if this month’s report is a blip or beginning of a more meaningful move to 2%.

The Week Ahead

With marque economic reports easily dismissed as second or third tier, this may be a week that earnings and speaking engagements from central bankers take center stage.

He Said, She Said.

Between minutes on top of the Federal Reserve meeting and Bank of England meeting minutes we get central bankers out in public sharing their views.

Chairman Powell and U.K.’s Governor Bailey are the marque speakers.
The minutes will be a bit stale, but the speakers will serve up more up-to-date views, especially after the Consumer Price Index report the previous week.
Other than the speakers, we get to digest some housing numbers, a durable goods orders report and Purchasing Managers Index.

How Good is Good?

While we are at the tail end of quarterly earnings, next week is a powerhouse week not only because of Nvidia, but we get a decent sampling of earnings from retailers.

Nvidia (NVDA) results should dazzle, with revenue for the quarter nearing $25 billion, however it is future guidance that matters and with Nvidia, the poster child for AI up about 95% year to date, investors may need to see a lot more runway going forward.
With TJX Companies (TJX), Target (TGT), William-Sonoma (WSM), Ross Stores (ROST), Dollar Tree (DLTR) and Macy’s (M) on the calendar we should get a good look at consumer spending.

Looking Eastward

Central banks in New Zealand, China and South Korea could fuel market action.

No changes are expected from New Zealand, Bank of China, Bank of Korea, or the Bank of Indonesia but if there are surprises, we will hear about it when we wake up.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2 billion.

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