Mid-Year Market Update and Outlook

One of the biggest shortfalls of the financial media ecosystem today is a lack of accountability. Financial market pundits who appear on outlets such as CNBC, Fox Business, Bloomberg, the Wall Street Journal, and many others are often rewarded in terms of media attention for making bold predictions which are out of consensus. In particular, bearish market pundits tend to get more attention than bullish market pundits as fear is an easier message for media outlets to sell.

Taking a look at how the S&P 500 has performed so far in 2024 compared to initial estimates by Wall Street firms shows just how difficult forecasting can be. The below chart, which was published by the New York Times in late 2023, shows the initial S&P 500 price targets set by leading banks. For context, the S&P ended 2023 at 4,769.

As of June 22, 2024, the S&P 500 is now trading at 5,464 (up ~14.5% year-to-date). While it remains to be seen where the index will close for the year, the bearish projections put forward by JP Morgan Chase, Morgan Stanley, Wells Fargo, Jefferies, UBS, and others has certainly proved well off the mark thus far. While most firms below have raised their 2024 price target for the S&P 500, there is little attention paid to just how off the mark these projections initially were.

An important takeaway here for individuals is that it makes little sense to pay much attention to most market forecast. Moreover, investors should be especially skeptical of overly bearish financial market pundits as incentives tend to reward being bearish as opposed to being accurate.

Against this backdrop, and in contrast to the lack of accountability in most of the financial media, I will review the performance of my own market predictions and previously suggested model portfolio allocations.

2024 Best Ideas Performance

I released by best ideas for 2024 in a piece published on December 24, 2023. The best ideas are repeated below:

1. Favor low fee ETFs over high fee active mutual funds

2. Buy AAA CLO ETFs as an alternative to cash or money market funds

3. Favor municipal bonds over similar maturity Treasuries

4. Overweight duration in the portfolio context

5. 10 single names I am bullish on (META, GOOG, MSFT, FDS, SPGI, V, MKTX, UNH, LMT, GPI)

In regards to low fee vs high fee, it is too early to asses performance on active vs passive as Q2 figures have not yet been published. However, it should be noted that the relative performance of high fee products tends to be worse vs passive products as the time period of analysis extends since the impact of fees becomes more significant.

CLO ETFs, as represented by the Janus Henderson AAA CLO ETF (JAAA) have delivered a total return of 3.75% on a year-to-date basis while cash (represented by T-Bill ETF BIL) has delivered a total return of just 2.51%.

Municipal bonds have outperformed similar maturity Treasuries. BAB, the most liquid taxable muni ETF, has delivered a total return of 0.86%. IEF, a Treasury ETF with similar duration profile, has delivered a total return of -0.74%.

Going overweight duration in the portfolio context has not proved a great idea thus far as longer maturity bonds have performed more poorly than shorter maturity bonds as rate cut expectations have fallen. EDV, a long duration Treasury ETF is down 5.5% on the year compared to the -0.74% return delivered by IEF thus far.

Some of my single stock recommendations have worked out quite well. META, GOOG, and MSFT have delivered total returns of 40%, 28%, and 20% respectively. Other names such as FDS, MKTX, and UNH have performed poorly having delivered total returns of -10.8%, -33%, and -7.6% respectively.

Moderate Risk Model Portfolio Performance

I initially released the Blue Chip Portfolios Moderate Risk Model Portfolio on January 14, 2024 in a post published here. As a reminder, this model portfolio is designed to showcase my best thinking around how to construct a easy to implement portfolio which delivers superior returns to a 60/40 portfolio with similar levels of risk.

As shown by the tables below, the Blue Chip Portfolios Moderate Risk Model Portfolio has delivered a total return of 9.6% thus far in 2024 compared to a total return of 8.2% delivered by a traditional 60/40 portfolio. The model portfolio gains have been driven by a number of factors including the 46% return of Bitcoin, a modest overweight to equities, and better positioning within fixed income.

Note that the portfolio has not been rebalanced and thus the current weight column below differs from the initial weight due to market movements.

Outlook

Overall, I maintain conviction in most of the ideas I have put forward earlier in the year. In particular, I continue to have conviction high in low fee over high fee products, AAA CLO ETFs, as well as a modest overweight to equities.

While I still find municipal bonds attractive vs Treasuries, the spread compression that has occurred thus far this year will make it more challenging for the asset class to outperform during the remainder of the year.

In regards to duration positioning, on a structural basis I continue to believe that having moderate duration exposure in a portfolio context makes sense. Given the high level of interest rates, high quality bonds have significant diversification potential relative to equities if economic conditions worsen. That said, I believe the election could result in a moderate move higher in long-term rates if Trump wins the election and Republicans gains control of both the senate and the house. The reason for this is that Trump is likely to favor more tax cuts and increased pressure on the Fed to cut rates while Biden is more likely to favor some level of increased taxation for corporations and high income individuals.

I remain bullish on all of the single name stocks that were on my 2024 best ideas list.

In terms of portfolio construction, I continue to favor the inclusion of a modest alternatives bucket which includes exposure to gold, Bitcoin, and trend following strategies.

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