Hope you all had an enjoyable and safe Memorial Day weekend celebrating those that paid the ultimate sacrifice for our country! I’m glad to see a debt ceiling deal seems to have been agreed upon in principle over the weekend, which hopefully will remove a major headline risk. It certainly doesn’t resolve any of the long-term structural deficits our country faces, but those aren’t going to be resolved in a debt ceiling standoff anyways.
The market is extremely bifurcated currently. Most of the rally has been centered around a handful of stocks with favorable artificial intelligence (AI) storylines associated with them. Large caps are dramatically outperforming small and mid-cap stocks. This really has been the trend since early March when the banking drama began. The Russell 2000 (IWM) went from being 473 bps ahead of the S&P 500 to now being behind by over 8% and the difference is far more with the tech focused QQQ as well. Small cap and cyclical stocks are preforming like they are in a deep recession, priced lower than in very serious prior downturns. The actual economic picture has been far better, so I think this provides an attractive opportunity for long-term investors to buy them cheaply, which we are indeed doing. Even if we do get a recession, the downside scenarios seem priced into many of them already.
Stocks like Facebook, Alphabet, and Amazon had indeed gotten cheap in 2022 and early this year, which made them attractive buys. We bought the stocks and sold puts. At current prices, they aren’t in a bubble, but they also don’t offer as much of a margin of safety as before. Other stocks such as Nvidia seem to be in bubble territory, but I certainly don’t suggest shorting them. Many smaller market capitalization stocks are trading at very attractive valuations, offering high dividend and earnings yields.
Bonds are also particularly attractive right now. From short-term, to municipal, to long-term high yield, we have found very attractive opportunities. There are quality bonds yielding between 7-11% with solid risk profiles, which to me are more attractive than owning the indices at current prices, where so much of the performance has been achieved through the most overvalued and largest stocks.
If you have a 401K or 403B and would like to look at your portfolio allocations, please don’t hesitate to contact us and we can go over that, as it might be a good time to rebalance some from stocks to bonds, when your options are limited to just mutual funds. I also wanted to share our YouTube channel with you and our latest video Learn to Treat Your Investment Portfolio as a Business
In this video we outline our philosophy in terms of treating your investments as a business, which includes managing your assets and liabilities in an optimized level. Credit card debt and high-cost loans can be a very hard burden to shake, while maximizing your assets with active management and discipline can greatly improve your financial outcomes. Please take a moment and subscribe to the channel and maybe like the video if you feel so inclined, as it will help us grow. We will be releasing timely and educational content very regularly, so I hope that you enjoy it. Thank you all so much and we appreciate each and every one of you tremendously.