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Planning for 2024: An Exercise in Futility

We borrowed an adage from Dwight D. Eisenhower to explain the financial planning and investment philosophies we expected to pursue when we launched Solyco Wealth:

Indubitably, the behaviors of financial markets in 2023 proved our adoption of Ike’s approach prescient. Before advancing our plans for next year, we think it a good idea to perform a quick review of actions this year.

Along with much of the rest of the investment community, we expected a recession in 2023, if only a mild one. Instead, US economic growth roared higher, thumbing its nose at the Fed and its interest rate hikes as domestic consumers spent the funds pandemic support programs placed in their pockets. Shame on us for anticipating that savings rates would remain abnormally high as consumers exercised a degree of caution exiting the upheaval of 2020 to 2022. Silly us!

Our investment planning process, however, shielded us from much of the destruction wrought on bond markets by higher interest rates. We also relied heavily on our stock-picking acumen and sell discipline to post very attractive returns, not only relatively but also absolutely, despite remaining underweight the Technology sector year-to-date. Recently, we executed much of our tax-loss selling program for 2023 which not only allowed us to benefit clients by reducing their prospective tax bills but also forced us to re-evaluate our investment thesis for lagging sectors like Materials and Healthcare.

So, with these quick 2023 observations, on to views for 2024!  Underpinning our approach to investing in 2024 are the following expectations:

• The US Federal Reserve Bank executed its last increase for this cycle.
• Inflation trends lower but fails to approach the Fed’s 2% target as housing expenses stay elevated and oil prices exhibit ongoing volatility.
• Interest rates, thus, will remain higher for longer than many investors forecast constraining credit formation.
• Domestic employment will remain robust with only very modest increases in the unemployment rate.
• As a result of only a normalizing unemployment rate, economic growth remains positive albeit slowing substantially from 3Q23’s 4.9% annualized growth rate.
• Foregoing a recession, earnings growth in 2024 amounts to ~10% (see graphic from FactSet below).

• Investment grade and government debt provide positive total returns next year with high-yield spreads widening amidst increasing default rates and tightening credit conditions.
• Major equity indices generate high single-digit returns in response to solid earnings growth, increased breadth as compared to this year’s 2023 Tech-dominated run higher, and not exorbitant price-to-earnings multiples (see FactSet chart below).

• Major equity indices generate high single-digit returns in response to solid earnings growth, increased breadth as compared to this year’s 2023 Tech-dominated run higher, and not exorbitant price-to-earnings multiples (see FactSet chart below).

Based on the above expectations, we expect to overweight the Consumer Staples and Industrials sectors vis-à-vis our Russell 3000 benchmark while underweighting Technology, according to the following table. Previously, our model and client portfolios carried overweights to the Materials and Industrials sectors while being underweight Financials and Technology.

With respect to our positioning on Fixed Income, we remain short duration as compared to the benchmark US Bloomberg Aggregate Bond Index. While we find long-dated US Treasuries intriguing at recent levels, we see little reason to endure the volatility of long-dated bonds in light of the relatively very flat yield curve. We continue to prefer getting paid to wait in short-term positions and equities with the prospects of duration out-performance likely linked only to the Fed choosing to cut rates, a phenomenon we see possibly occurring some time late in 2024, if then.

As we learned on 2023, geopolitical events create substantial risks to the best thought-out economic forecasts and investment plans. The increasingly interlinked nature of these risks – restrictive China trade policy limiting the international flow of dollars that, in turn, reduces world demand for US Treasuries at a time of substantial required new issuances, for example – argue for research-rich, risk averse, and active management approach to investing.

Solyco Wealth’s Aggressive Model Portfolio Generates Stand Out Performance

Positive impact from 3Q23 mergers and acquisitions activities significantly affected Solyco Wealth’s Aggressive Model Portfolio. Permian Resources (PR) bid for portfolio holding Earthstone Energy (ESTE) resulted in a 35.1% uplift over the quarter, while Cisco Systems’ offer for co-holding Splunk (SPLK) saw its shares move 38.2% higher in 3Q23. Notably, Aggressive held a double-weight, 6% position in ESTE shares as compared to the typical 3% weighting for individual equity positions in the portfolio. These positive forces propelled the Aggressive Model Portfolio 2.5% higher for the quarter and 18.8% thus far in 2023, after fees, leading to respective outperformances of 5.9% and 8.5% vs. the S&P 500’s 3.2% loss for 3Q23 and 10.0% gain thus far in 2023.

Overall, each of Solyco Wealth’s four model portfolios, after our 1% annual management fee, were positive since their September 8, 2021, inception as shown in the table below. For each of the 16 periods observed, the four models outperformed their respective benchmarks as well. Prescient stock-picking since inception and a pivot to higher fixed income weightings mid-2023 strongly positioned all of the portfolios to compete with the S&P 500 despite the significant fixed income weightings of the Conservative (65%), Moderate (45%), and Moderately Aggressive (25%) portfolios. The inverse impacts of these higher fixed income weightings and, thus, lower equity weightings in the more conservative models show up in the S&P 500 relative performances for the YTD and 1-Year periods.

Aggressive Model Portfolio

As relayed in our opening comments above, our Aggressive Model Portfolio enjoyed significant outperformance vs. its benchmark as well as the S&P 500 across the 3Q23, YTD, 1-Year, and Since Inception, time periods. Shown in the following table, Aggressive returned 2.5% in 3Q23, 18.8% YTD, 32.1% over the past 12 months, and 10.6% since its 9/8/2021 inception. As one would expect from an aggressive portfolio, equities drove the vast majority of this outperformance but with the fixed income allocation also outperforming as compared to the Bloomberg US Aggregate Bond Index for three of the four observed time periods.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% since the 9/8/21 inception of Solyco Wealth’s model portfolios.

Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.

Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.

Takeout-driven upside moves from Earthstone [ESTE (+35.1% at a 6% weighting)] and Splunk [SPLK (+38.2%)] accounted for much of Aggressive’s outperformance as both companies agreed to be acquired by larger suitors in 3Q23. With ESTE agreeing to an all-stock takeout and shares of SPLK trading within 7% of its all-cash acquisition price (with an estimated closing date of as much as 12 months away) we booked the gains and fully exited these positions. In exchange for these holdings, we added shares of oilfield services giant Halliburton (HAL) and Israeli customer relationship management (CRM) software services firm Nice (NICE). Aggressive also garnered double-digit 3Q23 upside contributions from YETI [+24.2% (YETI)] and CrowdStrike [+13.2% (CRWD)], the latter of which we also chose to sell in exchange for beaten-down communications semiconductor firm Qualcomm (QCOM). Overall in the portfolio, 20 positions generated positive contributions for the quarter while 19 swung to the darkside.

Thus, 3Q23 was not all puppies and candies for our Aggressive Model Portfolio. Delta Air Lines (DAL) declined 22.0% over the quarter in response to the spike in crude oil prices and the probable spillover impact on jet fuel expenses. Sociedad de Quimica (SQM), our chosen play on increasing lithium demand for battery electric vehicles also so an outsized 3Q23 loss as its shares dropped 17.0% in response to declining lithium prices and Chilean geopolitical turmoil. Celltower REIT American Tower (AMT) also incurred an ugly quarter, declining 15.2%, as other investors responded to the rise in long-term interest rates by heading for the exit door on AMT shares.

Moderately Aggressive Model Portfolio

In 3Q23 Solyco Wealth’s Moderately Aggressive Model Portfolio followed the overall lower trend for risk assets as it declined 1.74% for the quarter. This negative performance, though, proved to be 141 bps better than its benchmark and 155 bps ahead of the S&P 500 for the quarter. Since inception Moderately Aggressive remained 16.28% ahead of its blended benchmark and 10.07% better than the S&P 500.

Generally, Moderately Aggressive holds a 25% fixed income weighting with another 10% strategically weighted to cash. Tactically, however, we may deploy some or all of this cash position in client accounts in order to take advantage of what we deem to be attractive mis-pricings on a balanced risk-reward basis in portfolio securities.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% since the 9/8/21 inception of Solyco Wealth’s model portfolios.

Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.

Moderately Aggressive benchmark = total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.

Aiding performance for Moderately Aggressive in 3Q23 was a 14.2% return for publicly-traded private debt provider Hercules Capital (HTGC), which carries a 11.9% annual dividend yield. Joining shares of HTGC on the positive side of the ledger last quarter were Pioneer Natural Resources (PXD) and Alphabet (GOOGL), which moved 14.8% and 9.3% higher respectively. Overall, of the 40 positions held at some point over the three months of the quarter, 22 were negative and 18 positive. Since inception Moderately Aggressive has held 55 total positions with 30 positively contributing offset by 25 negative performers.

The same three stocks that presented performance headwinds for our Aggressive Model Portfolio also hamstrung Moderately Aggressive’s 3Q23 performance, albeit at a lower level of portfolio weighting: Delta Air Lines (DAL), Sociedad de Quimica (SQM), and American Tower (AMT). With a 7.5% weighting in the model, the 3.6% drop in the fixed income exchange traded fund (ETF) Vanguard Tax-Exempt Bond ETF (VTEB) also exacted an outsized negative impact on Moderately Aggressive’s 3Q23 performance.

Moderate Model Portfolio

The Moderate Model Portfolio also failed to generate a positive, after-fee return in 3Q23 as it declined 0.88%. It did, however, modestly outperform both its benchmark and the S&P 500. Relatively balanced outperformance for the 45% fixed income weighting, which performed 180 bps better than benchmark, and the same-size equity weighting, which outpaced the S&P 500 by 241 bps, reflected constructive securities selections from both asset classes. Moderate’s lifetime performance remained positive after fees through 3Q23 at +2.10%, 1112 bps better than its benchmark and 417 bps ahead of the S&P 500 (despite only a 45% equities weighting).

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% since the 9/8/21 inception of Solyco Wealth’s model portfolios.

Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.

Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.

As with Moderately Aggressive shares of Hercules Capital (HTGC) and Pioneer Natural Resources (PXD) led Moderate’s performance as they moved 14.2% and 14.8% higher last quarter. Sliding in just ahead of Alphabet’s (GOOGL) positive 3Q23 9.3% return, however, was a 6.2% contribution from another publicly-traded private debt provider held in the portfolio, Ares Capital (ARCC). Whereas Moderate allocates 1.35% to its equity positions, like GOOGL, we allocate 2.5% of the portfolio to both HTGC and ARCC, explaining ARCC’s greater performance contribution vis-à-vis that of GOOGL.

These differential weighting levels also account for much of Moderate’s 3Q23 downside. The 15% holding in Vanguard Tax-Exempt Bond ETF (VTEB) at a 3.6% loss and the 10% weighting in the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which experienced a 4.3% 3Q23 drop, defined Moderate’s two most challenging positions last quarter. Delta (DAL), though, still declined enough to rank as second-largest loser in the portfolio, down 22.0% for the quarter. Twenty positions in the Moderate model were negative in 3Q23 while 19 posted positive contributions.

Conservative Model Portfolio

Our Conservative Model Portfolio, which offers a 65% fixed income weighting, fell 39 bps after fees in 3Q23. Since its inception Conservative’s 488 bps of fixed income outperformance versus the benchmark Bloomberg US Aggregate Bond Index would be sufficient to rank it among the few bond-heavy positive performers before fees. Alas, the 209 bps of accumulated management fees over the past two years decidedly pull it into the after-fee loss category:  -0.84%.  This was 123 bps better than the all-equity S&P 500, however, and at a significantly lower level of volatility.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% since the 9/8/21 inception of Solyco Wealth’s model portfolios.

Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.

Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.

Hercules Capital and Ares Capital, which composed 5% of the Conservative Model Portfolio in 3Q23 (down from 10% earlier in the life of the portfolio), accounted for 108 bps of Conservative’s weighted upside last quarter. International energy leader TotalEnergies (TTE), which posted a +15.5% return for the quarter, ranked as Conservative’s 3^rd-best performer, just ahead of cash’s +1.26% return. Conservative carries a strategic 10% cash allocation.

Downside drivers for Conservative were the same as for Moderate, just at difference weightings:  Vanguard Tax-Exempt Bond ETF (VTEB), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), and Delta (DAL). Fixed income positions account for the five worst-performing holdings over the life of the Conservative Model Portfolio while, interestingly, the two private debt providers, HTGC and ARCC, rank as the Portfolio’s two top-performing holdings with respective total returns of +25.6% and 19.8%. Six of Conservative’s nine fixed income holdings generated a positive performance contribution in 3Q23 while 9 of the 27 positions held in the portfolio at some point over the course of the quarter were positive.

Outperforming in 4Q23 Likely Will Require Getting Out of 1H23’s Comfort Zone

It’s no secret to active investors that the 10 largest US stocks dominated market returns in 1H23. The following chart provided by AllianceBernstein with data assists from FactSet and Standard & Poor’s, details exactly to what degree these 10 companies drove the S&P 500’s 16.9% 1H23 total return. Notably, six of the 10 are Tech stocks while Amazon and Tesla fall into Consumer Discretionary and Alphabet and Meta reside in the Communication Services sector. Outperformance in 4Q23 and in 2024 probably will require investors to add some breadth to their holdings beyond these companies and sectors, possibly well beyond them.

Predictably, in our view, equity market behavior in 3Q23 largely follows a consolidation pattern consistent with investors – including us – processing disparate data on:

Inflation Fed actions International trade

Consumer spending ­2H23 and 2024 corporate earnings prospects ­Geopolitical tensions

Money flows thus far in 3Q23, though, convinced us of one thing: the same 10 stocks will not lead equity markets in 2H23 that drove performance in the first half of this year. For the balance of this year, we anticipate significant broadening of equity market positive performance. Such action would be part and parcel with our expectation for 2024 evolving into a stockpicker’s market vis-à-vis the substantially limited momentum-based drivers that defined 1H23. The value propositions, as reflected by price-to-earnings ratios, along with post-2Q23 earnings season trading patterns support this view. For instance as conveyed in the following graph, small caps over the past 50 years rarely traded as inexpensively as they recently traded.

The fact that a monumental magnitude of cash remains on the sidelines buoys our belief that the balance of 2023 will provide a positive backdrop for risk assets. Based on Capital Group’s chart below, entering 2H23 money market fund assets amounted to over $5.4 trillion, or about 14.7% of the recent S&P 500 market cap. Certainly the rapid run-up in short-term interest rates related to the Fed’s actions warrant investors holding heightened cash balances. However, as the Fed nears the end of its tightening cycle we expect the clarity offered for interest rates will lead much of this cash balance back to risk asset and equity markets.   

The combination of expectations for increasing market breadth and compelling valuations lead us to favor stocks in the Industrials and Materials sectors vis-à-vis S&P 500 sector weightings. Industrials companies we favor include Lockheed Martin (LMT), Rockwell (ROK), Delta (DAL), Honeywell (HON), Chart Industries (GTLS), and Wesco (WCC). The Materials side we retain in investor accounts Eastman (EMN) and Sociedad de Quimica y Minera (SQM). Outside of these sectors, we recently added Halliburton (HAL) and Tyson (TSN) to client holdings as well.

Pivoting to Preservation for the Balance of 2023

Exiting 2Q23 earnings season Solyco Wealth commenced pivoted client portfolios to take advantage of higher bond yields with less susceptibility to equity volatility and credit risk. While it increasingly appears that the US will forego a recession in 2023 – the Atlanta Fed’s recent GDPNow estimate pointed to 5.8% 3Q23 GDP growth! (see below) – we harbor no expectation that equity markets will reward such lofty economic performance. Rather, we anticipate that any incremental economic strength will be met, at least, with hawkish Fed rhetoric and, more likely, future increases in the Fed Fund Rate. With real yields of 2%+ now available with little duration risk, we choose to increase by a combined 10% short-term Treasury and corporate debt exposure while reducing stock ownership by 10% for our three more aggressive model portfolios.

Specifically, our allocations to equity range from 25% for our Conservative Model Portfolio to 80% for the Aggressive Model, as shown in the following table. Fixed Income allocations, which we achieve primarily with Exchange Traded Funds, as well as modest exposures to publicly-traded private credit vehicles Ares Capital (ARCC) and Hercules Capital (HTGC), range from 65% in Conservative to now 15% (up from 5%) in Aggressive. We continue to allocate to Cash for two primary reasons:

1. We desire to have “dry powder” on hand with which to opportunistically buy equities in the event they offer short-term opportunities we find attractive, and
2. Cash, via money market funds, now offers an attractive yield profile as an asset class with minimal risk.

As of last Friday, August 18, 2023, our asset allocation efforts served clients well on both absolute as well as relative basis, as shown below in our performance tables. We at Solyco Wealth are particularly proud of the fact that each of our four model portfolios, if even by the slightest of margins for Conservative, would have generated a positive return since their 9/8/21 reception after our 1% management fee. All of the performance figures below are as of Friday, 8/18/23, presented net of our 1% management fee, and generated using Morningstar Direct statistics.

Rising 2Q23 Equity Values Benefit Solyco Wealth Model Portfolios

Benefiting from rising equity values in 2Q23, Solyco Wealth’s four Model Portfolios posted an average return for the past quarter of +4.78%, ranging from +3.14% for the Conservative Model Portfolio to +6.68% for the Aggressive Model Portfolio. Alas, as each of our four portfolios not only retained fixed income and cash allocations but also substantially diversified equity holdings across the eleven S&P sectors, each of the Model Portfolios failed to keep pace with the S&P 500’s blistering 8.70% 2Q23 return.

As shown in the graphics below, however, since their inception on September 8, 2021, Solyco Wealth’s Model Portfolios continued to compare favorably, even after our 1% annual management fee, with both their benchmarks as well as with the S&P 500. On average since inception and after fees our four model portfolios outperformed their benchmarks by 10.54% and the S&P 500 by 3.84%. Ongoing strength from the equity portions of these portfolios continued to drive upside performance vis-à-vis consistent but more muted outperformances from the portfolios’ fixed income exposures.

The debt holdings of Solyco Wealth’s Model Portfolios, which we achieve via allocations to a diversified set of fixed income Exchange Traded Funds (ETFs), maintained their pattern of outperformance through 2Q23. In fact the performances of Solyco Wealth’s fixed income allocations exceeded those of the Bloomberg Barclays US Aggregate Bond Index (AGG) for all four of the portfolios across all time periods, as shown in the following tables. Notably, we overweighted ETFs levered to private credit, short duration, and credit holdings, from inception and largely maintain these overweight positions vis-à-vis the benchmark AGG.

Below we detail performance for each Portfolio and highlight the drivers for these performances. We also document notable changes, if any, made in portfolio composition during 2Q23.

Conservative Model Portfolio

Over the past year through June 30, 2023, the Solyco Wealth Conservative Model Portfolio, which carries a 65% weighting to debt securities, posted a return of +9.59%, which was 350 basis points (bps), or 3.5%, ahead of its weighted benchmark. Performance for the equities included in the Portfolio, which made up 35% of the Model, exceeded that of the S&P 500 by 4.43% over the past year; Conservative’s fixed income allocation bettered that of the AGG by 4.41% over the same time period. As shown in the following table, similar outperformance exists for fixed income since inception but with the Technology-driven equity outperformance in 2Q23 and YTD resulting in modestly lagging equity performances for those periods.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.

Unlike in 1Q23, when Technology ruled the roost of Conservative’s performance, in 2Q23 two of the top five performing securities in the portfolio – Hercules Capital [HTGC (+18.9% at a 5% weighting)] and Ares Capital [ARCC (+5.48% at a 5% weighting)] – provide private debt to micro- and small-cap companies. While HTGC and ARCC are publicly traded equities we include their weightings in our portfolios’ Fixed Income allocations as debt holdings drive their long-term performances. In addition to solid capital appreciation in 2Q23, ARCC and HTGC also offered the portfolio substantial dividends with recent respective annual yields of 10.1% and 12.8%. Joining ARCC and HTGC in garnering performance accolades for 2Q23 were airliner Delta Airlines [DAL (+36.1% at a 1.08% weighting)], Advanced Micro Devices [AMD (+29.6% at a 1.08% weighting)], and Amazon (AMZN (+26.2% at a 1.08% weighting).

Inhibiting Conservative’s 2Q23 performance were Anheuser-Busch [BUD (-13.9% at a 1.08% weighting)], which bungled marketing for its Bud Light brand, Southeast US utility Entergy (ETR (-9.4% at a 1.08% weighting)], and Nike [NKE (-9.72% at a 1.08% weighting)] which appears to possibly still be suffering from inventory overhangs in China. Vanguard Short-Term Treasury [VGSH (-0.6% at a 15.0% weighting)] ranked as the 4th worst-performing holding in the Conservative portfolio for the quarter. For the 36 securities held in the portfolio at some point in 2Q23, 22 generated a positive contribution offset by relatively very light headwinds from the 14 negatively performing holdings.

Since our 9/8/21 inception the most positive drivers for the Conservative Model Portfolio remain the same, for the most part, as those of 2Q23 with the +84.1% return for since-sold oilfield services company SLB supplanting AMZN from our list of top performers. Other notable positive contributors that remain in the portfolio include energy company TotalEnergies (TTE) and defense contractor Lockheed Martin. The worst-performing holdings for the Since Inception period include Vanguard Emerging Markets Government Bond [VWOB (-25.1%)], iShares iBoxx Investment Grade Corporate Bond [LQD (-15.1%)], and iShares Mortgage-Backed Securities [MBB (-10.9%)]. Of the 49 holdings in the Conservative Model Portfolio since inception, 24 generated a negative contribution while 25 offered a positive input for return calculations. Currently, the Portfolio retains nine debt securities and 24 equity holdings.

Moderate Model Portfolio

While the Moderate Model Portfolio remained 9.20% ahead of its benchmark and +1.75% versus the S&P 500 since inception, in 2Q23 this Model lagged its benchmark by 0.40% and the S&P 500 Index by 489 bps. The tactical decision entering 2023 to underweight the Technology sector, which looked relatively expensive to us on all fronts – historical price-to-earnings, future price-to-earnings, ratios to other sectors’ price-to-earnings multiples (and continues to do so) – explains roughly one-half of Moderate’s underperformance for 2Q23 and YTD as compared to its benchmark. However, with a 45% Fixed Income weighting in the Moderate Model Portfolio, no conceivable way existed for the fund to keep pace with the performance of the all-equity S&P 500.

Double-digit positive contributions from Tech stocks AMD, Microsoft [MSFT (+16.8%)], and Applied Materials [AMAT (+14.3%)], performed yeoman’s work offsetting the overall underweight to Tech versus the S&P 500 and the benchmark. Significant upside performances on a relative basis from HTGC, DAL, and AMZN, offset more than the double-digit losses from BUD, biotech BioNTech [BNTX (-3.4% at a 1.8% holding)], and a 9.4% loss for ETR, but not to anywhere close to a sufficient degree to make up for the portfolios Fixed Income allocation in combination with its Tech underweight.

The above table reflects a 1% annual management fee, equivalent to 0.20% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.

Since inception two energy and two health care holdings define two of the top five positive contributors for Moderate: SLB and Pioneer Natural Resources [PXD (+65.9% at a 1.76% weighting)] on the energy side and Vertex Pharmaceutical [VRTX (+63.52%] and AbbVie [ABBV (+49.7%)] on the health care side. Tech company, of course, AMD rounds out the Top 5 performers since inception for Moderate. Headwinding performance since inception, again, was VWOB, streaming media company Paramount [PARA (-53.6% – ouch!], LQD, and BNTX. The China situation also washed us out of Taiwan Semiconductor [TSM (-30.9%)], not only creating an ugly loss but also disallowing Moderate’s participation in 1H23’s AI-driven euphoria for semiconductor stocks.

Since inception Moderate’s ratio of winners to losers proved to be somewhat better than Conservatives as it posted 30 winners to 22 losers. Notably six (out of seven) of these losing positions originated in the Fixed Income space. Thus, on the equity side Moderate comes quite close to a two-to-one ratio of winners to losers:  29 winners to 16 losers. In our mind this ratio underpins the +12.46% outperformance vs. the S&P 500 since inception for the equity portion of the Moderate Model Portfolio.

Moderately Aggressive Model Portfolio

The Solyco Wealth Moderately Aggressive Model Portfolio returned +5.45% for 2Q23 and +11.23% YTD, driving Since Inception performance to +9.92%.  While Moderately Aggressive outperformed its benchmark and the S&P 500 since inception by 15.22% and 8.66%, respectively, it posted mixed near-term performance comparisons, as shown in the following table. Consistent for our Model Portfolios across the risk spectrum, outperformance from the more heavily weighted Technology sector, the Fixed Income allocation, and our management fee, represent the three primary drivers of these negative short-term comparisons.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Moderately Aggressive benchmark = total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.

Moderately Aggressive exhibited comparatively wide breadth across asset classes and economic sectors in its 2Q23 out-performers. From the Industrials space airliner DAL led the portfolio higher with its +36.1% move for the quarter while Tech companies AMD (+29.6%) and ServiceNow [NOW (+19.8%)] posted outsized contributions alongside AMZN (+26.2%) from the Consumer Discretionary sector and private debt provider HTGC (+18.9%). Downside drivers showed similar diversity as well with drug developers Incyte [INCY (-13.9%)] and BNTX (-13.4%) providing the most significant headwinds, followed by Citizens Financial [CFG (-12.8%)] from the banking sector, utility ETR (-9.4%), and NKE (-9.7%) from the Consumer Discretionary sector.

Despite the fact that we sold shares of SLB (+84.1%) out of the portfolio several quarters ago, it remains the largest positive contributor to Moderately Aggressive’s returns for the Since Inception period. Fellow oil and gas company PXD (+65.9%) also ranks highly as an upside driver as does international lithium mining concern Sociedad de Quimica y Minera [SQM (+55.6%)]. Rounding out the top five performers since inception for the portfolio are Industrials concern Wesco [WCC (+58.6%)] and semiconductor provider AMD. Downside drivers for Moderately Aggressive since inception largely were the same as for the less aggressive Moderate Model Portfolio:  PARA (-53.6% – ouch, again), VWOB (-25.1%), CFG (-34.7%), BNT (-32.7%), and TSM (-30.9%).

Aggressive Model Portfolio

The combination of greater equity exposure and relatively strong stock-picking enabled performance for the Aggressive Model Portfolio to overtake that of its sister Moderately Aggressive Model Portfolio for Aided substantially by the decidedly “risk on” tenor of asset markets in 1H23, Solyco Wealth’s Aggressive Model Portfolio posted relatively very strong respective YTD and 1-Year returns of +15.8% and +24.8%. Notably, these returns include 5% allocations to both fixed income securities and to cash which typically act as stiff inhibitors to performance vis-à-vis that of the S&P 500 in investing environments like that of 1H23. While Aggressive lagged the S&P 500 by over 200 basis points (bps) in 2Q23, it outdistanced that index by 528 bps over the past year and by 667 bps since its inception on 9/8/21, including the impacts of the portfolio’s 1% annual management fee.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.

In 2Q23 Aggressive’s higher beta (i.e. higher risk-higher reward) holdings fulfilled much of their rewards’ profiles as e-commerce company Shopify [SHOP (33.3%)], small-cap oil and gas producer Earthstone [ESTE (+9.8% at a 6% weighting)], and engineering and equipment manufacturer Chart Industries [GTLS (+27.4%)] all outperformed. Aggressive also benefited from positive contributions from its 3% weightings in DAL and AMD. International equities offset a portion of Aggressive’s gains in 2Q23 as Chinese equities Alibaba [BABA (-8.1%)] and YUM China [YUMC (-10.7%)] joined BNTX in going the wrong way after our initial purchases. Previously mentioned CFG and ETR also traded down in 2Q23.

The 52 holdings in the history of the Aggressive Model Portfolio have almost been symmetrical with respect to their positive-negative contributions as 25 moved higher against 27 moving lower during their holding period in the portfolio. To the upside SQM, ESTE, SLB, WCC, and VRTX led, each with contributions since inception in excess of 55%. Downside movers since inception, four of which we retain in the Aggressive Portfolio, are YETI (-60.0%), CFG, BNTX, PARA, and cell tower owner American Tower [AMT (-31.8%)], which is a component of the Real Estate sector. Notably, while the top five positive contributors to Aggressive since its inception all posted contributions >55%, the five largest negative returns averaged -39% with YETI’s -60% drop defining the most negative return. Also potentially of interest, by virtue of actively managing our client accounts and prudently dollar-cost averaging client capital into our model portfolios, the largest recent effective loss from YETI in a client portfolio was -2.6%.

Thoughts on Artificial Intelligence and Asset-Price Bubbles

The stratospheric rise of the stock price for graphics chipset pioneer NVIDIA (NVDA) and other artificial intelligence (AI) participants invokes more than a few thoughts of asset-price bubbles. As Wharton Professor Jeremy Siegel recently noted in commentary on the subject, “momentum can carry stocks far higher than their fundamental value, and no one can predict how high they might go.” We argue that price appreciation far above a company’s fundamental value hardly warrants being labeled a “bubble.” Appreciation of 160% in less than six months, however, warrants heightened scrutiny.

We concede that several fundamental reasons exist for reputable companies to move significantly higher in compressed periods of time:

• Takeout bids
• Product or service innovation that opens up significant new markets
• Removal or reduction of litigation risk
• Removal or reduction of credit or “going concern” risk
• Discoveries of life-altering drug treatments
• Discoveries of substantial resource endowments like gold, oil, or other precious minerals

Unfortunately, only time will tell if this move across AI-driven stocks was a bubble or not. A potential test for those looking to deploy fresh capital to these companies (an investing subset in which Solyco Wealth is not currently participating) being driven higher by AI aspirations:

How and to what degree will the target companies’ offerings aid their customers in either driving revenue and/or cash flow higher from existing customers or in expanding the total addressable market for their products/services?

In order for this move higher for AI-levered stocks not to be a bubble – it’s added $100s of billions in cumulative market cap in a relatively compressed period of time – AI will need to create substantial incremental sales or result in vast expense reduction (or both) for customers.The replacement of existing legacy chipsets in hyperscale data centers with AI-capable chipsets alone, in our view, will not be sufficient to support this recent move higher as this action alone would solely represent a potential pull-forward of an existing upgrade that likely would have happened over the next 1-3 years anyway. Instead, these newly AI-capable data centers will need to help their customers do a whole host of new activities or complete their past activities far more efficiently. Fundamentally, without these ultimate AI customers benefiting this move higher probably represents little more than an interim phase of substantial multiple inflation for a very limited subset of Tech equities. Indicative of the potential to create value, however, NVDA’s founder noted that the company struck a deal with advertiser WPP (WPP) for AI-generated advertising. Not exactly the value creation we hope for…but maybe it’s a start.

While we at Solyco Wealth are not chasing the AI move higher, we also managed not to completely miss it as well. Several of our semiconductor and equipment (AMD, ANET), communication services (GOOGL), consumer (AMZN), and Industrials (WCC), companies obviously benefited from an NVDA-led pull-through to higher equity valuations. Largely, however, we have looked to “fade” this move higher by booking gains and/or selling covered calls in these select positions. Again, only time will tell how right/wrong this action will be, but we do know two things at this point:

1. It’s better to have participated in the move higher than not, and
2. We can always redeploy the cash generated from selling shares or covered calls later if the fundamental conditions, in our view, make buying attractive.

Repositioning Portfolios for Moderating Consumer Strength and Ongoing Financial Turbulence

Outside of the shockingly fast failures of Silicon Valley and Signature Banks, the strength with which the Technology and Communication Services sectors finished 1Q23 undoubtedly defines the biggest surprise for equity markets for the first three months of the year. Led by a meteoric 81.9% rise from Meta (aka Facebook) to start the year, the Communication Services Select Sector SPDR (XLC) exchange traded fund (ETF) moved 23.1% higher for 2023 through April 17th. Similarly, NVIDIA’s (NVDA) artificial intelligence chip-driven investor fury led to an 84.8% rise in its shares and a 19.8% appreciation for the Vanguard Information Technology (VGT) ETF.

Alas, we do not foresee such tailwinds persisting for either of these sectors as we progress through 2023. In response to this view, we remain Underweight Tech, as you can see in the following table. We add an Underweight to Financials to our sector views as well. Offsetting these lower-than-benchmark weightings, we maintain Overweight the Industrials and Materials sectors. We also see fit to upgrade Utilities to Equalweight, which only translates to a 2.8% weighting, or roughly a single-stock holding in the Solyco Wealth Model Portfolios.

Symbol	Description	Russell 3000 Weighting	Previous Solyco Wealth Weighting	New Solyco Wealth Weighting	SW Diff vs. R3000
VGT	Vanguard Information Technology ETF	24.1%	21.1%	21.1%	-3.0%
XLV	Health Care Select Sector SPDR® ETF	14.5%	14.7%	14.5%	0.0%
XLF	Financial Select Sector SPDR® ETF	13.5%	11.7%	10.0%	-3.5%
XLY	Consumer Discret Sel Sect SPDR® ETF	10.1%	11.3%	10.1%	0.0%
XLI	Industrial Select Sector SPDR® ETF	9.7%	13.7%	13.7%	4.0%
XLC	Communication Services Sel Sect SPDR® ETF	7.7%	7.5%	7.7%	0.0%
XLP	Consumer Staples Select Sector SPDR® ETF	6.6%	6.1%	6.6%	0.0%
XLE	Energy Select Sector SPDR® ETF	4.9%	5.3%	4.9%	0.0%
VNQ	Vanguard Real Estate ETF	3.0%	3.0%	3.0%	3.0%
XLB	Materials Select Sector SPDR® ETF	2.9%	5.6%	5.6%	2.7%
XLU	Utilities Select Sector SPDR® ETF	2.8%	0.0%	2.8%	0.0%

A couple vagaries inherent in how the index masters construct and populate these sector indexes bear mention, in our view. First, our Overweight to Industrials more reflects our affinity for Airlines and expectations for an ongoing rebound in air travel and the fact that this sub-category resides in the Industrials index rather than the more logical, in our opinion, Consumer Discretionary sector. Any sector-focused discussion also would be misleading these days without a quick mention of the massive degree of concentration plaguing several of these indexes. For instance, Amazon and Tesla recently composed approximately 40% of the Consumer Discretionary, as do Apple and Microsoft for the Tech index and Meta and Google for the Communication Services index.

Thoughts underpinning our sector positioning as we move through 1Q23 earnings season and look to the balance of the year include:

• Moderating US consumer spending strength brought on by:
  • Weakening wage growth
  • Exhausting influences of inflation-era prices on pandemic savings
  • Regressing rates of experience consumption to pre-COVID levels
  • Stagnating advertising markets and rates
• Increasing funding costs for financial institutions amid slow- to no-growth US economy
• Onshoring and infrastructure improvements driving modest demand growth for related Industrial and Materials investments.

The fact that on a price-to-earnings (P/E) basis Tech already trades at a rich, 20%+ premium to the 5- and 10-year average P/E multiples for the sector amidst data provider FactSet’s expectations for a year-over-year drop in earnings on almost flat sales informs our Underweight to that sector. Certainly these reserved financial expectations leave room for upside, but we argue that the P/E premium likely already reflect this potential. As for our Materials Overweight vis-à-vis the relatively ugly picture portrayed for the sector in the table below, previously mentioned index-construction quirks and our specific securities selectins within that sector drive our view. Specifically, significantly more conservative 2023 EPS expectations for fertilizer and metals producers as compared specialty chemicals and lithium producers define the differences in our positionings.

Symbol	Description	2023 Y/Y EPS View	2023 Y/Y Sales View	2023 P/E	5Y Avg. P/E	10Y Avg. P/E
VGT	Vanguard Information Technology ETF	-0.3%	1.3%	24.5x	22.1x	19.0x
XLV	Health Care Select Sector SPDR® ETF	-9.0%	2.7%	17.8x	16.0x	16.0x
XLF	Financial Select Sector SPDR® ETF	9.5%	8.0%	13.1x	13.0x	13.0x
XLY	Consumer Discret Sel Sect SPDR® ETF	25.0%	5.3%	24.5x	26.8x	22.5x
XLI	Industrial Select Sector SPDR® ETF	11.0%	3.8%	18.3x	19.3x	17.7x
XLC	Communication Services Sel Sect SPDR® ETF	15.0%	3.8%	20.4x	19.1x	15.7x
XLP	Consumer Staples Select Sector SPDR® ETF	2.5%	3.8%	20.4x	19.7x	19.3x
XLE	Energy Select Sector SPDR® ETF	-22.0%	-11.4%	10.9x	3.4x	15.7x
VNQ	Vanguard Real Estate ETF	0.3%	5.3%	17.4x	19.5x	NM
XLB	Materials Select Sector SPDR® ETF	-16.0%	-3.4%	17.0x	17.1x	16.5x
XLU	Utilities Select Sector SPDR® ETF	7.5%	-3.6%	18.4x	18.6x	17.5x

Strong 1Q23 Risk-Asset Markets Benefit Solyco Wealth Model Portfolios

A 1Q23 rebound in risk-asset markets resulted in each of Solyco Wealth’s four model portfolios posting positive returns for the past quarter. Net of fees this drove the average outperformance for the portfolios versus their respective benchmarks to 4.55% for the prior year and to 9.85% since their 9/8/21 inception, as shown in the following graphs. Alas, the particularly strong equity market performance in 1Q23 translated to modest after-fee average underperformance for the four portfolios of -0.36% versus benchmark and 2.03% vs. the S&P 500. Notably, each of the four model portfolios also retains a fixed income weighting, ranging from 65% for the Conservative Model Portfolio to 5% for the Aggressive Model Portfolio, that typically hampers performance in strong equity markets. For the quarter the portfolios’ fixed income holdings underperformed their Bloomberg US Aggregate Bond Index (AGG) benchmark by an average of 0.45% while equities in the portfolios lagged performance of the S&P 500 for 1Q23 by 0.47%.

For the more extended 1-year and Since Inception time periods stock-picking across the four model portfolios remained the primary driver of outperformance as, on average and after fees, portfolio performance from equities in the portfolios exceeded that of the S&P 500 by 6.01% for the 1-year period and by 11.53% since inception. The comparable comparisons for the portfolios’ fixed income holdings versus AGG were +0.41% and +0.46%.

Conservative Model Portfolio

The Solyco Wealth Conservative Model Portfolio, after its 1% annual management fee, returned 3.52% for 1Q23, -2.07% for the 1-year period, and -3.48% since inception, as shown in the following table. These returns figures resulted in benchmark comparisons of -0.88% for the just-ended quarter, +2.80% for 1-year, and +5.31% since inception. The Conservative Model Portfolio generally holds a 65% fixed income weighting with allocations of 20% to equities and 15% to cash rounding out its holdings.

Solyco Wealth Conservative Model Portfolio Comparative Performance: 1Q23, 1-Year, and Since Inception
		1Q23	1-Year	Since SW Inception
Benchmarks	S&P 500	7.50%	-7.73%	-6.78%
	Russell 3000	7.17%	-8.59%	-9.66%
	MSCI All-World ex-US	8.02%	-2.74%	-8.92%
	Bloomberg US Agg Bond	3.01%	-4.51%	-10.33%
Conservate Model Portfolio	Portfolio Return	3.52%	-2.07%	-3.48%
	Benchmark Return	4.49%	-4.80%	-8.77%
	+/- Benchmark	-0.88%	2.80%	5.31%
	+/- S&P 500	-3.98%	5.66%	3.30%
	+/- Equities vs. S&P 500	-1.62%	5.10%	10.28%
	+/- Fixed Income vs. Agg	-0.63%	1.54%	1.69%

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q23 and 1.58% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.

Consistent with the primary driver of equity market positive performance in 1Q23, Technology holdings Advanced Micro Devices [(AMD) +51.3%] and Applied Materials [(AMAT) +26.4%] led the portfolio higher, followed by Amazon.com (AMZN) with a +23.0% gain for the quarter. The portfolio also realized large positive contributions from the Vanguard Tax-Exempt Bond ETF [(VTEB) +2.78% at a 10% weighting] and Vanguard Short-term Treasury ETF [(VGSH) +1.64% at a 15% weighting]. Five holdings in 1Q23 increased by over 20%, indicative of the strong tailwinds for equities last quarter.

Healthcare, which generally is considered a “defensive” sector, generated headwinds for the Conservative Model Portfolio as holdings CVS Health [CVS) -19.7%] and Johnson & Johnson [(JNJ) -11.6%] gave up ground in 1Q23. Insurer The Travelers Companies [(TRV) -8.1%] failed to help performance as well. We anticipate Healthcare improving as investment capital either rotates to it from pro-growth sectors like Technology and sub-sectors like Restaurants in response to a slowing economy or fresh equity-focused dollars enter the markets as the US economy continues to whistle past the graveyard.

Realized gains from sales over the past year of Deere & Company [(DE)+34.5%] and Marathon Petroleum [(MPC) +26.6%] joined a +24.2% 1-year contribution from ongoing holding TotalEnergies (TTE) in driving Conservative’s 1-year outperformance. Notably, VTEB at a 10% weighting in the portfolio accounted for a sizeable portion of performance as weightings to individual equities in the portfolio amount to about 1.08%. While we softened our Energy positioning mid-4Q22 due to valuation, we continue to find the municipal bond space attractive due to solid fundamentals, increasing yields, and the prospects for higher future marginal tax rates.

Horrid performances over the past year from since-sold Vanguard Emerging Markets Government Bond ETF [(VWOB) -15.9%] and still-held Hercules Capital [(HTGC) -18.8%] and iShares iBoxx High Yield Corporate Bond ETF [(LQD) -10.4%] offset the positives generated by DE, MPC and TTE. Proof of the volatility experienced over the past year, AMZN – a lead-performer in 1Q23 – actually defined the worst return in the portfolio, declining 36.6% for the year, but only at a 1.08% weighting. We continue to be AMZN fans as the company possesses significant opportunities to drive operating leverage and thus, cash flow to its bottom-line. With respect to HTGC, we believe that the company, which is a provider of private debt to high-growth Tech, Biotech, and Industrial companies, thoughtlessly fell victim to the “sell-first” mentality driven by the Silicon Valley Bank failure. In our view SVB’s demise, if anything, makes HTGC’s offerings more compelling given that it retains a very strong liquidity position with very little default risk evident to date.

Since inception Energy and Defense led performance for the Conservative portfolio with oilfield services company SLB (SLB) generating an 84.1% booked-gain, followed by TTE’s +46.5% and a 40.9% gain for fellow ongoing holding Lockheed Martin (LMT). Also of note, private capital provider Ares Capital (ARCC) posted a +7.0% move since inception at a 5% weighting. To the downside VWOB lost 25.1% for the portfolio since inception before we sold it out of the portfolio while still-held fixed income exchange traded funds (ETFs) LQD and iShares Mortgage-Backed Securities (MBB) lost 14.8% and 10.3%, respectively. We held VWOB under the incorrect assumption that the earlier moves to higher rates for many emerging market governments in combination with higher oil prices would create relative attraction for other governments’ debt versus that of the US. Russia’s assault on Ukraine and a flight to quality, however, over-whelmed our thesis. Again, AMZN, with a 41.1% loss for the portfolio since inception, represented the biggest loser, but at a much smaller weighting in the portfolio.

Moderate Model Portfolio

The Moderate Model Portfolio, which carries 45% fixed income and equity weightings against a 10% cash allocation, posted performances after fees of +4.24% for 1Q23, -2.57% for the past year through 3/31/23, and -0.77% since inception. As shown in the following table, while Moderate’s 1Q23 performance lagged that of its benchmark and the S&P 500, its long-term comparisons remain relatively attractive: +9.22% vs. benchmark and +6.01% vs. S&P 500 since inception.

Solyco Wealth Moderate Model Portfolio Comparative Performance: 1Q23, 1-Year, and Since Inception
		1Q23	2023	Since SW Inception
Benchmarks	S&P 500	7.50%	-7.73%	-6.78%
	Russell 3000	7.17%	-8.59%	-9.66%
	MSCI All-World ex-US	8.02%	-2.74%	-8.92%
	Bloomberg US Agg Bond	3.01%	-4.51%	-10.33%
Moderate Model Portfolio	Portfolio Return	4.24%	-2.57%	-0.77%
	Benchmark Return	5.60%	-6.30%	-9.96%
	+/- Benchmark	-1.31%	3.78%	9.22%
	+/- S&P 500	-3.26%	5.16%	6.01%
	+/- Equities vs. S&P 500	-1.50%	5.35%	12.57%
	+/- Fixed Income vs. Agg	-0.43%	0.18%	-0.01%

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q23 and 1.58% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.

Technology holdings also propelled the Moderate Model Portfolio higher in 1Q23 as Arista Networks [(ANET) +38.3%] joined the aforementioned AMD (+51.3%) and AMAT (+26.4%) in benefiting performance. Healthcare also proved to be the primary 1Q23 challenge for Moderate performance as insurer Centene [(CNC) -22.9%] and biotech BioNTech [(BNTX) -17.1%] joined CVS (-13.6%) in creating performance headwinds.

A 10% weighting to the Vanguard Tax-Exempt Bond ETF (VTEB), which generated a +5.46% return for the portfolio, proved a prudent 4Q22 addition. It joined ANET (+20.8%), DE (+34.5%), and auto parts supplier Borg Warner [(BWA) +28.3%] as best-performing holdings for Moderate over the past year. We like BWA not only for its legacy leadership in turbochargers and engine components, but also for its growing exposure to electric vehicles (EVs). We think the technology inherent in EV components will be vastly more value-added as the sector scales than the ability to assemble those components.

To the downside for the portfolio, media and entertainment company Paramount Global [(PARA) -50.0%] joined VWOB (-15.9%), and HTGC (-18.8%) in holding back performance. We unfortunately held onto PARA thinking it was not a value trap and that the sizeable stake acquired by Warren Buffett would buoy its share price: we were wrong, obviously.

Since Inception SLB (+84.1%) and fellow energy firm Pioneer Natural Resources [(PXD) +60.8%] best performed for the Moderate portfolio, along with since-sold Vertex Pharmaceuticals [(VRTX) +63.5%]. To the downside shares of Comcast [(CMCSA) -34.7%] joined VWOB (-25.1%), PARA (-53.6%), LQD (-14.8%), and AMZN (-41.1%) in offsetting the portfolios positive contributors. Comcast, in our view, retains among the more compelling valuation profiles in the market. Alas, misplaced (in our opinion) concerns about declining broadband growth belie this strong valuation profile and propensity to return substantial excess capital – which resulted largely from past substantial broadband subscriber growth – to shareholders.

Moderately Aggressive Model Portfolio

While 1Q23 and 1-year performances for Solyco Wealth’s Aggressive Model Portfolio overtook those of its Moderately Aggressive Model Portfolio, Moderately Aggressive remained the firm’s top-performing portfolio since inception. With a +4.24% after-fee return for Moderately Aggressive since inception, outperformance versus benchmark amounted to 14.42% and versus the S&P 500 to 11.02%.

With a 65% equity weighting, performance of Moderately Aggressive’s stock picks exceeded that of the S&P 500 by 11.02% since inception and by 6.47% for the past year even after giving back 1.98% in 1Q23. The 35% fixed income allocation outperformed the AGG by 1.21% over the past 12 months and by 1.76% Since Inception with a 0.68% lag for 1Q23.

Solyco Wealth Moderately Aggressive Model Portfolio Comparative Performance: 1Q23, 1-Year, and Since Inception
		1Q23	1-Year	Since SW Inception
Benchmarks	S&P 500	7.50%	-7.73%	-6.78%
	Russell 3000	7.17%	-8.59%	-9.66%
	MSCI All-World ex-US	8.02%	-2.74%	-8.92%
	Bloomberg US Agg Bond	3.01%	-4.51%	-10.33%
Moderate Model Portfolio	Portfolio Return	5.52%	-1.26%	4.24%
	Benchmark Return	6.22%	-6.81%	-10.16%
	+/- Benchmark	-0.67%	5.57%	14.42%
	+/- S&P 500	-1.98%	6.47%	11.02%
	+/- Equities vs. S&P 500	-0.55%	6.38%	14.54%
	+/- Fixed Income vs. Agg	-0.68%	1.21%	1.76%

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q23 and 1.58% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Moderately Aggressive benchmark = total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.

Best-performing positions for 1Q23 for Moderately Aggressive: AMD (+51.3%), Salesforce [(CRM) +50.7%], and AMAT (+26.4%). The worst-performers: CNC (-22.9%), banker Citizens Financial Group [(CFG) -22.1%], and BNTX (-17.1%). Six stock holdings in Moderately Aggressive appreciated more than 20% in 1Q23. We retain CFG ownership as our assessment of its ability to retain deposits in the wake of the banking crisis remains positive. Cracks in commercial real estate lending, however, would create problems not just for CFG, but for the vast majority of major-market and regional banks.

For the 12-month period DE (+34.5%), BWA (+28.3%), and CRM (+14.9%) drove upside performance. Headwinds primarily related to negative returns from PARA (-50.0%), AMZN (-36.6%), and CFG (-30.2%).

Lithium producer Sociedad Quimica y Minera de Chile [(SQM) +66.5%] joins already-mentioned energy firms SLB (+84.1%) and PXD (+60.8%) in generating positive results Since Inception for Moderately Aggressive. Similar to the downside drivers mentioned above for the Moderate portfolio, PARA (-50.0%), VWOB (-25.1%), AMZN (-36.6%), and CMCSA (-34.8%) also limited Moderately Aggressive’s since-inception results. Of note, however, the portfolio retained greater than 20% upside contributions from nine of its holdings for the period.

Aggressive Model Portfolio

The combination of greater equity exposure and relatively strong stock-picking enabled performance for the Aggressive Model Portfolio to overtake that of its sister Moderately Aggressive Model Portfolio for the 1-year and Since Inception periods. With a +8.62% 1Q23 return after fees, Aggressive posted a just-negative 0.61% return for the past 12 months and a just-positive 1.18% return since inception. These figures exceeded those of Aggressive’s benchmark by 1.43% for 1Q23, 6.03% for one year, and 10.43% since inception. Aggressive sports a 90% equity allocation with a 5% fixed income exposure and a 5% cash allocation.

Solyco Wealth Aggressive Model Portfolio Comparative Performance: 1Q23, 1-Year, and Since Inception
		1Q23	1-Year	Since SW Inception
Benchmarks	S&P 500	7.50%	-7.73%	-6.78%
	Russell 3000	7.17%	-8.59%	-9.66%
	MSCI All-World ex-US	8.02%	-2.74%	-8.92%
	Bloomberg US Agg Bond	3.01%	-4.51%	-10.33%
Moderate Model Portfolio	Portfolio Return	8.62%	-0.61%	1.18%
	Benchmark Return	7.21%	-6.64%	-9.25%
	+/- Benchmark	1.43%	6.03%	10.43%
	+/- S&P 500	1.12%	7.12%	7.96%
	+/- Equities vs. S&P 500	1.79%	7.21%	8.71%
	+/- Fixed Income vs. Agg	-0.06%	-1.29%	-1.60%

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q23 and 1.58% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.

A +45.8% from South American e-commerce firm MercadoLibre (MELI) joined upside contributions from AMD (+51.3%) and CRM (+50.7%) to Aggressive’s benefit in 1Q23. These and other positive returns more than offset the losses accrued by CFG (-22.1%), CVS (-19.7%), and BNTX (-17.1%), for the last quarter. Seven equity holdings posted 20% or greater returns in 1Q23.

MercadoLibre [(MELI) +45.8%] also won the year for aggressive, followed by DE’s +38.0% contribution and a 32.6% gain for Performance Food Group (PFGC). If PARA (-33.5%), CFG (-30.2%), and YETI (-33.3%) would have performed just a little better, Aggressive might have posted a positive return for the 12-month period too!

Sociedad Quimica y Minera de Chile (SQM) at +66.5%, SLB at +84.1%, and VRTX at +63.5%, paced Aggressive’s performance Since Inception. Unfortunately, YETI (–58.8%), Shopify [(SHOP) -60.8%] and CMCSA (-34.7%) substantially pulled down Since-Inception performance for the portfolio.

Yes, a Recession Is Coming; No, It Won’t Be the End of the World for Equity Investing

We at Solyco Wealth anticipate the U.S. entering the most forecasted and discussed recession in economic history some time in 3Q23. One need do little more than scan Bloomberg, CNBC, or any other financial press headlines to discover the all-too-numerous drivers of this impending economic downturn. In short, recessionary drivers encompass various degrees of impacts from the U.S. Federal Reserve escalating the prevailing interest rate environment to counteract inflationary forces that resulted from aggressive acceleration of demand for goods and services, the satisfaction of which labor, logistics, and policy issues complicated, as the country and the world recovered from the worst of the COVID-19 pandemic. Oh yeah, and there was an energy price-spike brought on by Russia invading Ukraine right as that inflation component really started to take root and accelerate. Uhm, I’m forgetting something else, too, that consumers and, thus, economies dislike…bank failures! Thankfully, no one expects anything from the U.S. Congress for another couple months until the Debt Showdown: the fun just never stops!

If Jerome Powell and Team Fed could solve all of the above with interest rate policy, they should be the subjects of the next Marvel superhero movie!  Soft landing? I think we’ve already experienced more than a few bumps. Anyone failing to anticipate a few things going “thud” navigating out of lockdowns and re-starts should have exited this economy and returned to graduate school or run for public office.

Anyway, while recessionary impacts may be imminent, we do not necessarily think this translates to a repeat of 2022 for risk asset markets. The fact that returns stunk for pretty much everything but oil stocks last year defines the biggest driver of this opinion: most markets already priced in expectations for crummy 2023 performance last year! This leads us to another potential source of sunshine: asset markets remain forward-looking. Based on this simple forward-looking hypothesis we would not be surprised to see equity markets trade flat to 10% lower over the next six months as investors parse out the probable magnitude (small, we think) and duration (short, we expect) of this 2023 recession. To take advantage of this expectation Solyco Wealth commenced to generate cash in client accounts earlier this month so as to continue dollar-cost averaging into the securities we most desire to own. When appropriate, we also engaged in writing covered calls against core equity positions in response to upward volatility spikes.

At this point doomsayers may be shaking their heads and wondering where in the world an intelligent investor could possibly derive positive market views. “It’s a recession!” they exclaim. We calmly agree, but append that exclamation with the fact that many people anticipated this recession and, thus, adjusted for its likelihood some time ago. In support of this claim, we present a several graphs below from Doubleline and Bloomberg and Morningstar describing the magnitude of 4Q22 earnings surprises, 2023 earnings revisions, and some context for 4Q22’s earnings performances.

Certainly, we would not be surprised to see the magnitude of revisions in the graph above accelerate with 1Q23 reporting season. In fact, we would find it shocking if company managements chose not to take the opportunity to lower the bar again for 2023 earnings expectations given the negative economic environment and its well-stated and documented challenges. The other side of this “lowering the bar” process, however, easily could be a priming of the pump for more robust, recovery-like expectations for 2024. Again, markets always look forward.

While consumer spending and attitudes appear to remain comparatively resilient, a number of economic components indicate declining inflation. Compounding the impacts of higher interest rates, tighter credit conditions resulting from the collapse of Silicon Valley Bank and Signature Bank will continue to slow economic activity as well. The following table also show that the costs of shelter, which compose 40% of the Consumer Price Index, fell earlier this year, a phenomenon that almost certainly will continue with tighter credit markets.

Goods inflations, as relayed in the chart below, started declining months ago. Recently, drops in Services costs joined this decline in Goods prices. The China restart could create a short-term bump higher in Goods prices, but we anticipate ongoing declines in Shelter and Services costs more than compensating for it. Bottom-lining it: at least a little good on the inflation front is starting to materialize in 2023 to offset much of what was so bad in 2022.

We conclude with the fact that declining earnings do not always foretell falling equity prices. As shown in the following scattergram pilfered from LPL, more than a few times over the past 70 years the S&P 500 rose despite declining earnings estimates. So you’re saying there’s a chance…

Rolling Options on Volatile Equities Offers Several Benefits

Covered call options and cash-secured put options represent key components of valuation and volatility management at Solyco Wealth. We remained very active in the options markets in response to the heightened volatility in equity markets that characterized the close of 2022 and the beginning of 2023. Substantial moves higher and lower for well-held stocks such as NVIDIA, Amazon, Netflix, Tesla, and Meta, among many others provide motivation for having a well thought out strategy to roll contracts prior to engaging in an initial options trade.

We engage in the options markers with an explicit strategy in place to “roll” covered calls on stocks that appreciated well beyond, and on short puts for stocks that moved significantly below, the strike price of expiring contracts. The term “roll” describes the process of repurchasing an options contract prior to expiration and subsequently selling a contract on the same underlying equity at a future expiration date.

Our roll strategy encompasses several key tenets, including:

1. Explicit valuation targets for the underlying equities
2. Ongoing knowledge of earnings and ex-dividend dates that may trigger early exercise
3. Sufficient account liquidity to fund repurchases of options contracts
4. Minimum premia equivalent to 1% per month as compared to expiration

Rarely do we roll contracts before the day of expiration. The threat of losing a position to a dividend-driven call or pricing anomalies caused by event-driven volatility changes represent two instances that could demand an early roll.

The recent price action of NVDA provides an excellent illustration of the value of rolling covered calls. Whereas NVDA shares commenced 2023 trading in the $143 range, they recently were +60%, or $230 each. With solid, 20%+ appreciation by mid-January an investor could have sold a $200 call expiring February 17^th for over $2 per share, or $200 per contract as each option contract represents 100 shares of stock. While this implied 1.2% monthly return may appear relatively innocuous, annualized on a monthly basis such actions represent a 15.4% return. As compared to 2022’s stock market returns +15.4% appears worth the trouble in our view.

However, many other investors concluded that NVDA shares represented a bargain early in 2023. By the time February 17^th rolled around, NVIDIA traded to $214 per share. While the $143-investor could just allow their shares to be called and walk away with $202 per share, they also might have upwardly revised their NVDA price target to $250 on the basis of the company’s gangbuster 4Q22 earnings report. Rather than allow the shares to be called away at $200, the investor could pay the $14.80 or so to close out the covered call contract and “roll” to a future expiration. Notably, on 2/17 the $210 call expiring a well later on 2/24 generated over $10 in premium. One complication, though: the investor needs to fund the $4 per share difference in order to roll the contract.

NVIDIA shares offer a special, near-term example for rolling options contracts as its share price continued to escalate, reaching a recent $232. This ongoing appreciation theoretically provides several benefits for continuing to roll options on NVDA:

• Volatility likely remains elevated, offering attractive premiums for future contracts
• Shares edge closer to the ultimate $250 valuation target
• Trading volume probably remains highly active

Should NVDA shares achieve the $250 valuation target, rolling covered calls on the position also offers an investor time to evaluate and choose another target for their investment capital. This period of time also could prove valuable for end-of-year tax planning should an investor desire to push a capital gain to another year or from short- to long-term status.