Power of Disruption

On Portfolio Positioning: Markets Go Up and Down

It’s been nearly 18 months since the S&P 500 made its last all-time high. The challenging macro backdrop has been agitated by the Federal Reserve Open Market Committee’s (FOMC’s) fight on inflation in the U.S. This forces us, as investors, to balance expected near-term volatility with long-term opportunities. The market has been eerily calm in the face of the recent bank failures and continued rates hikes in May. The FOMC decided to pause their hikes on June 14^th but also indicated that they believe two more ¼ point rate hikes may be needed. In the near term, we expect a bumpy ride for markets as the market continues to watch the Fed and their continued battle against inflation. However, the market has been extremely resilient with most indices near YTD highs.

The U.S. consumer’s health will likely deteriorate with inflation remaining sticky and the job market showing eventual weakness. These conditions favor defensive sectors such as Health Care, Consumer Staples, and Utilities, while negatively impacting cyclical sectors, like Consumer Discretionary. However, the traditional “playbook” has not yet panned out for investors as Health Care (-8.5%), Consumer Staples (-2.8%) and Utilities (-6.3%) are down year to date through May. The S&P 500 ended May with a near 9% gain YTD with 90% of those returns coming from the top 7 stocks in the index.¹

Opportunity: Disruption through Innovation

Even in a slower economy, we are in an uncharted era of new technologies disrupting paradigms, shifting consumer behaviors, shaping changes to business models, and transforming how we interact with our physical environment. Last year’s pullback in growth equities is an opportunity for long-term investors, especially as inflation begins to decline and the pace of rate hikes slow. We have seen growth stocks begin to act very well in recent weeks.

The broader market has been able to look through the near-term volatility to longer-term trends that will likely provide for greater workforce productivity and growing profits. We favor quality companies with strong cash flows and earnings outlooks that are still rising in the face of a well discounted risk of recession. The risk of a deeper economic contraction, lower liquidity, and declining earnings growth are all factors that could limit a meaningful recovery in stocks in the near-term. Though, many market participants also see a possibility of a soft landing. It is this murky view that provides uncertainty in the near-term.

However, we received very strong earnings and outlooks from a few of the major players within the semiconductor sector who are uniquely exposed to Artificial Intelligence (AI) and Machine Learning (ML) during the first quarter earnings season. AI and ML are expected to play a significant role in various industries, including healthcare, finance, and manufacturing. Companies that invest in AI and ML solutions are likely to see significant benefits in terms of efficiency, productivity, and competitive advantage.

This revelation of increased investment in AI and ML has ignited investors interest in the sector as they search for companies who can benefit from this likely long-term investment cycle.

"The pace of progress in artificial intelligence is incredibly fast. Unless you have direct exposure to groups like DeepMind, you have no idea how fast—it is growing at a pace close to exponential." - Elon Musk

For the uninitiated, one example of AI being used in everyday life is virtual personal assistants, such as Apple's Siri, Amazon's Alexa, and Google Assistant. These AI-powered personal assistants use natural language processing and machine learning algorithms to understand and respond to voice commands. They can be used to perform a variety of tasks, such as setting reminders, playing music, answering questions, and controlling smart home devices.

Another example is image and speech recognition in smartphones. Many modern smartphones use AI to recognize faces, objects, and scenes in photos, as well as to transcribe speech in real-time. This technology makes it easier for users to interact with their devices and access information. These are just a few examples of how AI is being used in everyday life. As AI technology continues to advance, it is likely that we will see even more AI-powered applications and services that make our lives easier, more convenient, and more efficient.

We are also focusing in on other sub-segments of the economy where demand is likely to expand despite slower global economic growth such as:

• Robotics: As wages continue to rise, the investment in robotics becomes a more reasonable approach to controlling future workforce inflation. Many warehouse and manufacturing jobs are increasingly being replaced by robotics. Even companies like Chipotle have new tortilla chip robots that perfectly fry their chips, replacing the need for additional workers.


• Cybersecurity: As more and more companies and individuals rely on digital systems and online networks, cybersecurity is becoming an increasingly critical issue. Companies that invest in cybersecurity solutions, such as data protection, threat detection, and incident response, are likely to see significant growth opportunities over the coming decade.


• Clean Energy: The Inflation Reduction Act (IRA) will direct nearly $370 billion towards bolstering U.S. climate change mitigation. Accelerated adoption of cleantech and renewable energy is essential as the world takes steps toward net-zero emissions.


• Lithium: In November 2022, prices for battery grade lithium carbonate in China hit an all-time high of $85,058 per ton, eclipsing the record set just a month prior. Lithium pricing trends are deeply rooted in the transportation segment’s ongoing shift toward electrification (EVs). Elevated lithium prices boost the top and bottom lines for relevant miners.


• Internet of Things (IoT): IoT refers to the interconnected network of physical devices, vehicles, home appliances, and other items embedded with electronics, software, and sensors. IoT is expected to drive significant growth in the tech industry and has applications in numerous industries, including manufacturing, healthcare, and retail.


• Virtual and Augmented Reality (VR/AR): VR and AR are rapidly advancing and are expected to play an important role in various industries, including gaming, education, and entertainment. Companies that invest in VR/AR technology are likely to see growth opportunities in these markets and others.

In healthcare, we see increasing innovation in:

• Digital Health: The digital health market is growing rapidly, driven by the increasing demand for remote patient monitoring, telemedicine, and electronic health records. Companies that offer digital health solutions are likely to see significant growth in the coming years.


• Biotechnology: Biotechnology is a rapidly growing field that combines biology and technology to develop new products and treatments. Companies that specialize in biotechnology, particularly those focused on gene editing and regenerative medicine, are likely to offer good investment opportunities for future growth.


• Medical Devices: The medical device market is expected to continue to grow in the coming years, driven by the increasing demand for minimally invasive procedures and advances in technology. Companies that manufacture and develop medical devices are likely to see significant growth in the coming years.


• Precision Medicine: Precision medicine is an emerging field that uses personalized approaches to diagnosis, treatment, and prevention of disease. Companies that specialize in precision medicine, particularly those focused on genomics and personalized therapeutics, are likely to offer good investment opportunities for future growth.

Globally, we are also watching how a peak in the U.S. dollar could create attractive opportunities. China is a focus due to its gradual reopening from COVID-19 lockdowns, which could spur economic growth. In Europe, energy reserves are high, which could boost sentiment in European equities.

The bottom line is that even with a high likelihood of a continued economic slowdown, there are pockets of our economy that continue to grow – and grow quickly. This is another great reason why we believe in utilizing our bucket methodology as it keeps us invested with our assets that fall in the [4-7] year or [7+] year buckets so that we capture moves like we have seen in growth stocks over the past 3 months over time. There is typically a bull market somewhere and our job is to help you find it.

If you have any questions regarding your financial plan or your individual portfolio and how we are addressing the global opportunities, please reach out.

Warm Regards,

Notes:

1. Source: Saut Strategy. “Tailwinds” 6/5/2023

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Josh Miles and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Holding stocks for the long-term does not insure a profitable outcome. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. This is not a recommendation to purchase or sell the stocks of the companies pictured/mentioned. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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The MSCI All Country World Index (ACWI) is a free-float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 49 country indices comprising 23 developed and 26 emerging market country indices. The index is unmanaged and has no fees. One cannot invest directly in an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free-float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The MSCI EAFE Index consists of 21 developed market country indices. The index is unmanaged and has no fees. One cannot invest directly in an index.

The MSCI Emerging Markets Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of 26 emerging markets country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates. The index is unmanaged and has no fees. One cannot invest directly in an index.

The Russell Midcap Index is a subset of the Russell 1000 Index, excluding the largest companies to leave approximately 800 securities designed to represent the “mid cap” portion of the US equity market. (The Russell 1000 Index measures the performance of the large-cap segment of the US equity universe. It includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.) The index is unmanaged and has no fees. One cannot invest directly in an index.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. (The Russell 1000 Index measures the performance of the large-cap segment of the US equity universe. It includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.) The index is unmanaged and has no fees. One cannot invest directly in an index.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. (The Russell 1000 Index measures the performance of the large-cap segment of the US equity uni­verse. It includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.) The index is unmanaged and has no fees. One cannot invest directly in an index.

The Russell 2000 Index is designed to represent the “small cap” market of US equity securities, composed of approximately 2,000 of the smallest securities in the Russell 3000 Index. (The Russell 3000 Index measures the performance of the 3,000 largest US companies, representing most of the investible US equity market.) The index is unmanaged and has no fees. One cannot invest directly in an index.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the US equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (The Russell 2000 Index is designed to represent the “small cap” market of US equity securities, composed of approximately 2,000 of the smallest securities in the Russell 3000 Index.) The index is unmanaged and has no fees. One cannot invest directly in an index.

An investment cannot be made directly in an index. Indices are unmanaged and have no fees.

Credit: Callan Associates Inc. and the Callan Periodic Table of Investment Returns

Data Sources: Frank Russell, MSCI, Standard & Poor’s, Bloomberg Barclays Capital (via FactSet, Lipper, Morningstar); MSCI Index returns are net of dividends reinvested with the exception of the MSCI Emerging Markets Index and MSCI ACWI, for which returns are presented gross of dividends reinvested through 1998.

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An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre-payment risk, also apply.

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