February 6, 2024 By Curtis Trimble

Wrong, or Just Not Right Yet?

Solyco Wealth early in 2024 continued to pivot its model portfolio holdings and thus, client investments, toward assets that will benefit from falling inflation and declining interest rates amidst moderating domestic economic growth. With an intense valuation focus defining our investment process, for much of 2023 holdings in client portfolios reflected a contrarian viewpoint, which substantially carried over to 2024. As frequently happens when we find ourselves in positions juxtaposed with market actions, we asked, “Are we wrong?” With a wealth of economic and earnings data already produced thus far this year, we conclude that “we’re not wrong; we’re just not right, yet.” Trying to get closer to “right” faster, we recently made the following adjustments to the sector weightings that inform our individual equity selections as compared to those of the benchmark S&P 500:

  • Remain underweight Financials,
  • Reduce our underweight to Technology,
  • Reduce Industrials to a marketweight.

In terms of specific holdings, we exited all positions in Delta Airlines (DAL) from our portfolios, while trimming exposures to fellow names from the Industrials sector Honeywell (HON), Rockwell (ROK), and Lockheed Martin (LMT). Still not fans of the valuation profiles for the highest-flying Tech stocks, we opted to add exposure to that sector via much cheaper shares of NICE Ltd (NICE), FiServ (FI), TE Connectivity (TEL), and Uruguay-based international digital payments professor Dlocal (DLO). We also added shares of ag science leader Corteva (CTVA) to build out our Materials exposure. The new name Consumer Discretionary we added, VF Corp (VFC), also offers a compelling valuation profile, in our view, albeit with a turnaround likely required to fulfill its potential upside.

The potential for lower inflation and declining interest rates to result in modest volume increases with moderating input costs, which we anticipate leading to attractive margin expansion, drives our overweight opinions on stocks in the Consumer Discretionary and Staples and Materials sectors. Value-oriented Tech stocks, in our view, should benefit from a lower rate of discounting future cash flows from due to lower long-term interest rates. For Industrials the risk of trade restrictions limiting global growth opportunities appear to be too similar to the benefits from reshoring to warrant increased exposure.

We also significantly reduced our Cash allocation to 3% for our three more aggressive model portfolios from a range of 5% to 10% and to 5% for our Conservative Model Portfolio from a prior 15% Cash allocation. Concurrently, we also increased the duration profile of the fixed income Exchange Traded Funds (ETFs) that compose the debt allocations in these four model portfolios be adding a 5% to 10% weighting to the iShares Barclays 20+ Year Treasury ETF (TLT) while reducing allocations to the Vanguard Short-Term Corporate (VCSH) and Vanguard Short-Term Government (VGSH) ETFs.

We anticipate several other themes driving investment performance for Solyco Wealth and its clients in 2024 in addition those identified above:

  • China’s consumers regaining their confidence – Alibaba (BABA) and Yum China (YUMC)
  • Backlog monetization from diversifying international energy markets: Chart Industries (GTLS) and First Solar (FSLR)
  • Increased medical device innovation and consumption: Medtronic (MDT), Zimmer Biomet (ZBH) and Globus Medical (GMED), and
  • Hard-market insurance dynamics: Chubb (CB) and Traveler’s (TRV)

Solyco Wealth manages its model portfolios and client accounts with relatively few positions, typically between 28 and 32, including Fixed Income ETFs, so as to reflect the conviction we have in our investment process. Upon request, we are happy to share the composition of our Model Portfolios in support of answering the question, “Wrong, or just not right yet?”