This Week in Retirement Juice

With over 40 years of experience managing portfolios, I've witnessed this cycle firsthand. This wisdom is especially pertinent for professionals embarking on retirement or those already retired, guiding their investment strategies in the ever-changing financial landscape.

Templeton's insight reflects the heart of market psychology. Each stage—pessimism, skepticism, optimism, euphoria—signals a different investment climate. In my career, understanding these shifts has been key to successfully navigating different market conditions.

Recognizing opportunities in pessimism, exercising caution during skepticism, engaging wisely in optimism, and practicing restraint in euphoria are crucial skills for investors to cultivate.

The market dynamics of late 2021 and 2022 serve as a perfect example. In 2021, the market peaked amidst widespread euphoria, largely ignoring the risks of excessive monetary and fiscal stimulus. Many investors, caught up in the moment, overlooked the potential downside. As a seasoned portfolio manager, I was cautious about this exuberance.

The subsequent crash in 2022, affecting both stock and bond markets, was a stark reminder of the consequences of unchecked optimism. However, the recovery that followed in 2023 has been met with skepticism, which, in my view, is unwarranted.

I am reminded of my experience as a growth manager for a mutual fund company in the early 2000s when the dot-com bubble burst; those who recognized the overvaluation and adjusted their strategies preserved their wealth. Similarly, in today’s market, integrating these insights with a structured approach can lead to more strategic and resilient portfolio decisions.

My four decades in portfolio management have shown me the power of Templeton’s philosophy. By embracing these principles, you can make smarter investment choices in your retirement.

What’s Happening in Markets

The Big Picture:

• Large-cap US equities continue outperforming everything else. The dominance of Tech has continued this year pushing up US large-cap indices. Large-cap Health Care has also been a large contributor.

• Contrary to year-end expectations, small-cap has not been able to maintain its upward momentum this year. Year-to-date small-caps lag large-caps by over 5%.

• Anything that is interest rate sensitive got hurt last week as hopes for a March Fed cut appeared less likely. Utilities were down 3.7% while Reits dropped 2.2%. Aggregate US bonds were down 1.1% last week.

• The investment environment remains risk-on. Aggressive asset allocation strategies continue their outperformance.

Economy:

• The US economy seems to be in decent shape. The unemployment rate stands at 3.7%, inflation is trending down toward 3%, and all indicators of growth are pointing up.

• China’s recovery is stalling. GDP grew over 5% last year but warning signs keep emerging - slower retail sales, a high youth jobless rate (14%), and falling new home sales. Net foreign investment into China was negative for the first time last year indicating shifting global attitudes.

• The US Federal Government averted a shutdown, at least until early March. Washington does not give us much time to rest in between battles. I guess, the show must go on!

Equities:

• Earnings season in the US is underway so expect volatility and lots of noise as usual. Up this week: Netflix, GE, Tesla, Intel, Visa, JNJ, airlines

• The bottom appears to be in for semiconductors. Nvidia is up 20% YTD. The iShares Semiconductor ETF (SOXX) was up 7% last week

• Solar stocks keep getting pounded. The Invesco Solar ETF (TAN) was down almost 10% last week and down 47% from a year ago

Bonds:

• The Federal Reserve does not seem to be in a hurry to lower rates. The odds for a March rate cut are 50/50. I am closer to zero. Achieving 2% target inflation seems almost impossible to me given the existing geopolitical situation and supply chain repositioning. To go from 3 to 2% inflation would require a severe recession, and who wants that?

• Long-maturity bonds got clobbered last week with the iShares 20+ Treasuries ETF (TLT) down 2.5% for the week and -4.8% YTD.

• Short maturity continues to outperform long bonds. Over the last year, the iShares Short Treasuries ETF (SHV) is up over 5% while the most commonly used benchmark for US Bonds, the US Aggregate (AGG), is only up 1.1%.

Alternatives:

• Ethereum and Bitcoin were down last week, but since the launch of Bitcoin ETFs Ethereum has been outperforming. I continue to believe that crypto adoption is in its early stages and price volatility will settle down as ETF inflows and outflows balance out.

• Natural Gas prices continue to be incredibly volatile and trending lower. Down > 20% last week. Even cold weather can’t offset production increases. Energy prices, in general, have been choppy as geopolitical events have played a major role. Energy stocks in the S&P500 are down over 8% from a year ago. Alternative energy stocks are down even more.

• The US Dollar remains robust. Contrary to year-end expectations it continues to appreciate relative to major currencies. The Fed's stance on waiting longer on cutting rates has propped up the USD for now. A stronger USD has negatively affected international investment returns. As the Fed starts cutting rates later this year, the USD will come under pressure and international investments should benefit.

Signal Versus Noise

What’s Coming on Premium Wednesday😀 

• Asset Allocation Performance - Portfolio Implications

• Investor Risk Aversion - Exhuberant, Normal, or Fearful?

PLUS: