News & Views

Model Portfolios Post Good Start to 2025, Now What?

Relative to the S&P 500 the four model portfolios managed by Solyco Wealth started 2025 with attractive returns. However, early April 2025 tariff-related asset market disruptions laid waste to returns in a matter of just a few days. Thus, more important than past actions were our model portfolio adjustments made in response to equity market upheaval. Specifically, our actions in our model portfolios and, thus, client accounts included:

• Significant booking of tax losses both to position for the inevitable rebound as well as to add end-of-year flexibility;
• Active upgrading of positions to market leaders in anticipation of these companies being the earliest recipients of rebound investment capital; and
• Dynamic gains harvesting in efforts to rotate into beaten-down holdings with higher potential upsides while also sheltering those gains from prospective ongoing market declines.

Also of note are the actions we chose not to take, including:

• Reducing the >10% average cash holdings across our model portfolios and client accounts;
• Deploying any new investment capital toward greater equity exposure; and
• Drawing down the >10% average short-term fixed income exposure maintained in the models and investment accounts we manage.

Given the rapidity, breadth, and magnitude, of the decline in equity prices, we will remain perfectly comfortable waiting for others to search for and determine a “bottom.” Rather than participate in this bottom-fishing, we hope to be content deploying available liquidity into an upswing once others complete the difficult and painful work of defining “the bottom.”

At the end of this note we include full information on our Model Portfolio holdings and weightings.

For Any Who Still Care: 

Source:  FactSet and Solyco Wealth

We present each of the return figures above net of out respective management fee:  0.25% for 1Q25, 1.-0% for the last 12 months, 3% for the past three years, and 3.61% since our 9/8/21 inception.  For 1Q25, the inverse relationship between returns and risk profile correlates perfectly, as one would forecast for declining equity markets with Conservative posting a +0.47% return for the quarter by virtue of its much higher weighting to cash and fixed income (a combined 70%) vis-à-vis the Aggressive model’s 80% equity weighting.

The following table, which compares performances for Solyco Wealth Model Portfolios with those of their respective benchmarks offers further granularity for parsing out differential return drivers in 1Q25 and for longer time periods. Whereas recent returns suffered vs. those of the benchmarks from an underweight to international equities, substantially greater long-term outperformance illustrates the superiority of being significantly overweight domestic equities.  Notably, the top-performing holding for each of our portfolios in 1Q25 was Brazilian bank Itau Unibanco (ITUB), which generated a 28.3% return last quarter.

Conservative benchmark = total returns for 10.0% iShares Russell 3000 ETF (IWV), 65.0% iShares Core US Aggregate Bond ETF (AGG), and 10.0% MSCI ACWI ex-US ETF (ACWX), and 15.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
Moderate benchmark = total returns for 22.5% iShares Russell 3000 ETF (IWV), 45.0% iShares Core US Aggregate Bond ETF (AGG), and 22.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
Moderately Aggressive benchmark = total returns for 32.5% iShares Russell 3000 ETF (IWV), 25.0% iShares Core US Aggregate Bond ETF (AGG), and 32.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
Aggregate benchmark = total returns for 45% iShares Russell 3000 ETF (IWV), 5.0% iShares Core US Aggregate Bond ETF (AGG), 45% MSCI ACWI ex-US ETF (ACWX), and 5.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
All data is as of 3/31/2025. Since inception includes performance from September 8, 2021.
Source:  FactSet and Solyco Wealth

The left-hand graph below presents the degree to which our models consistently outperformed their benchmarks across time periods beyond last quarter. The graph to the right below relays model performances vis-à-vis that of the S&P 500, which understandably correlates closely with the equity weightings for the portfolios versus the 100% equity-weighted equity index.

Aggressive Model Portfolio

The Solyco Wealth Aggressive Model Portfolio generated an after-fee, -1.95% total return for 1Q25, lagging its benchmark by 277 basis points (2.77%) but outperforming the S&P 500 by almost the same amount: 2.33%. Since inception Aggressive outpaced the S&P 500 by 597 basis points (bps) and its benchmark by a much wider 22.41%.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q25 and 3.6% 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% iShares Russell 3000 ETF (IWV), 5.0% iShares Core US Aggregate Bond ETF (AGG), 45% MSCI ACWI ex-US ETF (ACWX), and 5.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

The following stocks drive Aggressive’s upside in 1Q25:

• Itau Unibanco [(ITUB), +28.3%]
• FMC Corp. [(FMC), +19.9%]
• Dollar General [(DG), +16.9%]
• Medtronic [(MDT), +13.4%]
• Eastman Chemical [(EMN), +11.5%]

Notably, we swapped EMN shares for those of FMC intra-quarter, illustrating the value of aggressive, active management. Dollar General defines one of the companies in which we booked a gain in early 2Q25 in order to rotate into a company for which we estimate greater future upside: Target (TGT).

The greatest detractors to 1Q25 performance for the Aggressive Model Portfolio were:

• Block [(XYZ), -36.1%]
• American Eagle Outfitters [(AEO), -29.8%]
• DLocal [(DLO), -25.9%]
• MongoDB [(MDB), -24.7%]
• Alphabet [(GOOGL), -18.5%]

Subsequent to end-1Q25, we swapped shares of XYZ, AEO, and MDB, for shares of Apple (AAPL), Restoration Hardware (RH), and Snowflake (SNOW).

Moderately Aggressive Model Portfolio

With a -0.38% return for 1Q25, net of the 0.25% management fee, our Moderately Aggressive Model Portfolio performance exceeded the performance of the S&P 500 by 3.9% while coming up 1.65% short of its benchmark’s performance. Despite a significantly more conservative asset allocation (35% cash and debt), ModAgg lags the S&P 500 since its inception by only 0.66%, not of its 3.6% management fee for that time period.  

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q25 and 3.6% 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% iShares Russell 3000 ETF (IWV), 25.0% iShares Core US Aggregate Bond ETF (AGG), and 32.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

For Moderately Aggressive the following positions drove 1Q25 upside performance:

• Itau Unibanco [(ITUB), +28.3%]
• FMC Corp. [(FMC), +19.9%]
• Dollar General [(DG), +16.9%]
• MercadoLibre [(MELI), +14.7%]
• Eastman Chemical [(EMN), +11.5%]

In terms of net contribution, Vanguard Short-Term Corporate Bond Exchange Traded Fund (VCSH) generated the 3^rd-highest impact, +0.36%, on ModAgg due to its 20% weighting in the portfolio last quarter. Just as in our Aggressive Model, we swapped EMN shares for those of FMC intra-quarter. We also moved out of Dollar General and into Target (TGT) early in 2Q25.

The greatest detractors to 1Q25 performance for the Aggressive Model Portfolio were:

• Block [(XYZ), -36.1%]
• MongoDB [(MDB), -24.7%]
• Alphabet [(GOOGL), -18.5%]
• Burlington Stores [(BURL), -16.4%]
• Advanced Micro Devices [(AMD), -14.9%]

We exchanged XYZ, MDB, and AMD shares just after end-1Q25 for same-size positions in Dell (DELL), Snowflake (SNOW), and NVIDIA (NVDA).

Moderate Model Portfolio

As our Moderate Model Portfolio carries a 45% fixed income weighting and a 10% tactical cash position, it performed much better in 1Q25 than the 100% equity-levered S&P 500:  -0.37% vs. -4.28%.  Since inception, however, equities obviously win out as Moderate lagged the index by 1,562 basis points, as shown in the bottom-right cell of the following table. Moderate remains a comfortable 899 basis points, or 8.99%, ahead of its benchmark since inception, though, again net of our 3.6% cumulative management fee.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q25 and 3.6% 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% iShares Russell 3000 ETF (IWV), 45.0% iShares Core US Aggregate Bond ETF (AGG), and 22.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

The five leading positions for Moderate in 2Q25 were:

• Itau Unibanco [(ITUB), +28.3%]
• FMC Corp. [(FMC), +19.9%]
• Dollar General [(DG), +16.9%]
• MercadoLibre [(MELI), +14.7%]
• Medtronic [(MDT), +13.4%]

As with the prior two model portfolios, FMC represents an intra-quarter addition while we also moved out of Dollar General in early April in favor of Kraft Heinz (KHC) shares as Moderate already owned TGT shares. The 20% weighting in the Vanguard Short-Term Corporate Bond Exchange Traded Fund (VCSH) substantially aided Moderate’s performance, just as it did ModAgg’s returns in light of the increasingly difficult environment for equities.

For the Moderate Model Portfolio the greatest headwinds to 1Q25 performance came from:

• Block [(XYZ), -36.1%]
• Target [(TGT), -22.1%]
• Alphabet [(GOOGL), -18.5%]
• Burlington Stores [(BURL), -16.4%]
• Microchip Technology [(MCHP), -15.0%]

Consistent with actions across our models, early in 2Q25 we moved out of positions in XYZ and MCHP and into Microsoft (MSFT) and Arista Networks (ANET). Upgrades in quality and upside potential motivated these moves, in addition to the prospective benefit of taking advantage of tax-loss opportunities for clients early in the year.

Conservative Model Portfolio

Our Conservative Model Portfolio, with a 65% combined weighting to fixed income and cash, was the only one of our models to post a positive return in 1Q25 as it added 0.47% last quarter, net of fees. For the Last 12 Month, 3-Year, and Since Inception periods, Conservative posted respective net-of-fee returns of +5.67%, +12.24%, and +10.5%, as shown in the following table. These returns compare well with those of the Model’s benchmark for each of these time periods.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 1Q25 and 3.6% 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% iShares Russell 3000 ETF (IWV), 65.0% iShares Core US Aggregate Bond ETF (AGG), and 10.0% MSCI ACWI ex-US ETF (ACWX), and 15.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

Conservative benefited in 1Q25 from the following stock’s performances for the quarter:

• Itau Unibanco [(ITUB), +28.3%]
• FMC Corp. [(FMC), +19.9%]
• Dollar General [(DG), +16.9%]
• Johnson & Johnson [(JNJ), +15.6%]
• MercadoLibre [(MELI), +14.7%]

The greatest detractors to 1Q25 performance for the Aggressive Model Portfolio were:

• Block [(XYZ), -36.1%]
• Target [(TGT), -22.1%]
• Alphabet [(GOOGL), -18.5%]
• Burlington Stores [(BURL), -16.4%]
• Microchip Technology [(MCHP), -15.0%]

We moved out of XYZ and MCHP last week and into Microsoft (MSFT) and Broadcom (AVGO), representing an effort to move into higher quality, less volatile equities.

Below, we include holdings and weighting information for each of our model portfolios.

Click table to enlarge.

Solyco Wealth Model Portfolios Expand Outperformance vs. Benchmarks in 4Q24, 2024

The four model portfolios constructed and managed by Solyco Wealth concluded 2024 with mixed results, correlated with the allocation of equities and fixed income within each model, as relayed in the following table. Whereas the equity-heavy Aggressive Model Portfolio posted a +1.34% total return for 4Q24 (including the impact of our 1.0% annual management fee), the 65% fixed income-weighted Conservative Model Portfolio generated a 0.97% loss for the quarter. Overall for 2024, however, each of our four model portfolios generated attractive after-fee returns, led by Aggressive’s 16.89%. Since inception Aggressive, which only carried an average 80% weighting to equities, generated a compounded average annual return of 10.51%, or a 39.90% total return, after fees. This outdistanced the performance of its benchmark by 26.02% over the same Since Inception time period.

Source:  FactSet and Solyco Wealth

Largely the case since the inception of Solyco Wealth on September 8, 2021, securities selection and portfolio diversification led our four model portfolios to outperform their respective benchmarks for across all time periods:  4Q24, 2024, 2023, 2022, 3-Year, and Since Inception. Each of our model portfolios, consistent with the benchmark composition data provided below, carries allocations to cash, fixed income Exchange Traded Funds (ETFs), and individual stocks. Typically, we invest the equity portions of our portfolios in the stocks of 28 to 32 companies with individual position sizes ranging from 1% in our Conservative Model to as high as 3% in our Aggressive Model.

As a result of anticipated increased volatility in 2025 as compared to 4Q24 and 2024, we reduced our equity weightings across the board for our Model Portfolios while modestly increasing our debt allocation and significantly raising our weighting to cash. Within the fixed income weightings of our Models, we tactically scaled duration back to only short-term securities with an average two-to-one preference for investment grade corporate debt versus US government debt.

Conservative benchmark = total returns for 10.0% iShares Russell 3000 ETF (IWV), 65.0% iShares Core US Aggregate Bond ETF (AGG), and 10.0% MSCI ACWI ex-US ETF (ACWX), and 15.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
Moderate benchmark = total returns for 22.5% iShares Russell 3000 ETF (IWV), 45.0% iShares Core US Aggregate Bond ETF (AGG), and 22.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
Moderately Aggressive benchmark = total returns for 32.5% iShares Russell 3000 ETF (IWV), 25.0% iShares Core US Aggregate Bond ETF (AGG), and 32.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
Aggregate benchmark = total returns for 45% iShares Russell 3000 ETF (IWV), 5.0% iShares Core US Aggregate Bond ETF (AGG), 45% MSCI ACWI ex-US ETF (ACWX), and 5.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
All data is as of 12/31/2024. Since inception includes performance from September 8, 2021. 
Source:  FactSet and Solyco Wealth

Below, the left-hand graph illustrates the degree to which consistent outperformance versus our benchmarks drives cumulative performance over longer time periods. While only in existence for slightly more than three years, we remain focused on long-term performance with an over-arching goal to remain consistent across all time periods in generating this expected long-term outperformance. The right-hand line graph, which offers a comparison of Model Portfolio performance vis-à-vis that of the S&P 500, illustrates the degree to which equity exposure through up and down environments contributed to our outperformance (or the lack thereof in the case of our more fixed income-oriented portfolios). In 2022, for instance, each of our four model portfolios benefited significantly not only from strong stock selections, by also from active asset allocation to equities versus bonds.

To a lesser extent asset allocation in 2024 also aided Model Portfolio performances versus their respective benchmarks. For instance, the average 20% allocation to Cash and Fixed Income for our Aggressive Model Portfolio generated a +4.0% return, 270 basis points better than the 1.3% return generated by the benchmark Bloomberg US Aggregate Bond Index (AGG). We remain highly cognizant of the fact, however, that this relatively modest higher return from the bond portion of our most aggressive portfolio paled in comparison to the much higher, MAG-7 driven 25.03% return offered by the S&P 500. The power with which Technology stocks commenced last year combined with the highly concentrated nature of this move higher left us playing catch-up for the entirety of the year. Entering 2024 we not only owned very few of these high-flying names, but we also exited these positions more often than not well before they achieved their highs for the year. Alas, missing moves of that magnitude marks the primary tradeoff for those of us in the investing realm that remain beholden to “valuation discipline.”

Aggressive Model Portfolio

The Solyco Wealth Aggressive Model Portfolio generated an after-fee, 16.89% total return for 2024 with 4Q24 amounting to 1.34% of this full-year figure. These returns, while significantly outdistancing those of Aggressive’s benchmark, lagged those of the 100% equity-weighted S&P 500 by 8.1% and 1.1%, respectively, for the 2024 and 4Q24 periods.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 5.0% iShares Core US Aggregate Bond ETF (AGG), 45% MSCI ACWI ex-US ETF (ACWX), and 5.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

Chart Industries (GTLS), which we entered 2024 with a “double-weight,” 6% position, defined the largest upside contributor for Aggressive as it generated a 77.5% return for the portfolio. Other significant contributors to 2024’s Aggressive Model Portfolio performance include:

• Broadcom (AVGO), a networking semiconductor and software provider,
• Solar panel manufacturer First Solar (FLSR), and
• Vistra (VST), an independent electric power producer.

Notably, none of these four companies remained in the Aggressive Model entering 2025 as each stock, ultimately, significantly exceeded our valuation target.

To the downside Aggressive suffered from poor performances from two semiconductor companies, ST Microelectronics (STM) and Advanced Micro Devices (AMD), which remains in the portfolio with recent respective estimated upside of 28.8% to the $150 level. Other downside movers held by Aggressive last year were APA Corp. (APA), an oil-and-gas producer, YETI (YETI), the beverage container and consumer products company, and payments technology company DLocal (DLO).

For 2025, we harbor particularly positive expectations from Aggressive’s holdings of Yum China (YUMC), the China-based operator of Kentucky Fried Chicken, Pizza Hut, and other restaurants, NICE (NICE), which is a Salesforce (CRM) look-alike focused on customer relationship management software and platforms for mid-size enterprises, DLO, and come-back stories Dollar General (DG) and Comcast (CMCSA).

Moderately Aggressive Model Portfolio

Solyco Wealth’s Moderately Aggressive Model Portfolio offered participants a +14.27% total return in 2024, 417 basis points (bps) better than its benchmark for the year. Over the past three years ModAgg generated a cumulative total return of 23.43%, 590 bps short of the S&P 500 but 1,456 bps ahead of the benchmark. As a reminder, ModAgg is composed of 65% equities, 25% fixed income, and 10% cash.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 25.0% iShares Core US Aggregate Bond ETF (AGG), and 32.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

Albeit at a significantly smaller weighting, GTLS also led ModAgg’s top-performers for 2024 with its 77.5% upside contribution for the portfolio. We also allocated weightings of VST and AVGO to the Moderately Aggressive Model Portfolio, which benefitted from their respective 65.4% and 52.0% contributions. A recovery in AliBaba’s share price, which we booked prior to an end-of-year turn lower, offered a 40.0% return while Financials Citizens Financial Group (CFG), which we held twice over the course of the year for a total +44.8% contribution, and PayPal [+33.0%, (PYPL)], also defined leading positive contributors for ModAgg. Notably, ModAgg also enjoyed a 4.8% positive contribution via active management of its fixed income ETF holdings, particularly a timely entry and exit of the iShares 20+ Year Treasury Bond ETF (TLT) for a +5.74% contribution.

As with Aggressive, painful downside moves from the following stocks significantly hampered ModAgg’s performance last year:

• ST Microelectronics, which lost 44.3%,
• APA, down 32.9%, and
• Advanced Micro Devices, –24.2%.

Long-term holding Nike (NKE) also offered headwinds, but an early 2025 price recovery for computer and data center storage chip manufacturer Micron (MU) offset much of that company’s 22.4% 2H24 loss for the portfolio as it continued to be held in the Model.

Moderate Model Portfolio

Consistent with its much lighter allocation to equities than our more aggressive models, the Solyco Wealth Moderate Model Portfolio generated a lower, 8.07% total return for 2024. This raised that Model’s cumulative total return since its 9/8/21 inception to 16.02%, after deducting 3.3% of total management fees for the 3+ year period. While Moderate’s 2024 outperformance versus its benchmark only amounted to 0.6% last year, it remains cumulatively 1,115 bps ahead of its benchmark since inception.

Moderate carries a 45% fixed income weighting. Equities also make up 45% of the Model with a 10% cash allocation balancing the portfolio’s strategic allocations.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 45.0% iShares Core US Aggregate Bond ETF (AGG), and 22.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

Payment processing and financial technology significantly aided Moderate’s 2024 returns as it enjoyed a 33.0% move higher from its PYPL allocation as well as similar 32.3% appreciation from FiServ (FI). Technology infrastructure player Corning (GLW), BABA, and VST, also provided outsized upward moves for the Model. In terms of weighted contribution, TLT, the 20+ year US Treasury ETF, ranked as the 2^nd-largest contributor to Moderates total return as we had a 10% allocation for much of the year that generated an unweighted return of 12.1%.

Downside culprits for Moderate were the same stocks as for our ModAgg and Aggressive Model Portfolios:

• STM,
• APA,
• NKE,
• AMD, and
• MU.

Reflective of our conservative stance entering 2025, we tactically allocate our Moderate Model Portfolio in the flowing manner:  20% cash, 30% fixed income, and 50% stock. Harboring concerns about how long-term interest rates will react to economic conditions amidst significant probable policy disruption, Moderate carries a 20% weighting to the Vanguard Short-Term Corporate Bond ETF (VCSH) and a 10% weighting to its companion US Treasury ETF, Vanguard Short-Term Treasury ETF (VGSH). Should clarity arise concerning economic policy implications and/or significantly attractive buying opportunities for high-quality equities, we stand ready and willing to aggressively pull down this 20% cash position in favor of increasing Moderate’s 1.67% allocation to each of the 30 stocks that compose its equity holdings. For much of 2024, for instance, Moderate carried a 60% equity weighting.

Conservative Model Portfolio

With a 65% fixed income weighting, in 2024 the Solyco Wealth Conservative Model Portfolio returned 6.89% after our 1% management fee. Effective duration exposure, particularly from its TLT weighting, primarily drove Conservative’s performance much higher for the year than the AGG’s 1.31% total return. For the year Conservative’s relatively modest 25% equity weighting generated approximately one-third of its total return, indicative of the readily apparent fact that even value-tilted equities like those primarily held in our Conservative Model still significantly outperformed bonds in 2024.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 65.0% iShares Core US Aggregate Bond ETF (AGG), and 10.0% MSCI ACWI ex-US ETF (ACWX), and 15.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

Returns from clothing and accessories maker Tapestry (TPR), parent company of Coach, digital payment processor Block (SQ), and chicken producer Tyson (TSN), joined TLT, VST, BABA, and FI, to drive upside realizations for Conservative. Complementarily, VCSH and VGSH also generated positive performances at significantly heavier weightings for the Model.

Downside headwinds came from the same stocks as for our riskier portfolios:  STM, APA, NKE, AMD, and MU. Entering 2025, however, the Conservative Model Portfolio only retained allocations to AMD and MU, with Micron recovering much of its later-2024 loss early in 2025. We expect returns for our Conservative Model Portfolio in 2025 to largely depend on its short-term debt and cash allocations with capital preservation defining its primary reason for participation.

Solyco Wealth Model Portfolios Generate Stellar 3Q24 Results

Three phenomena propelled Solyco Wealth’s four model portfolios significantly higher in 3Q24:

1. Holding long-duration debt positions into the August 2024 market swoon and subsequently selling those positions;
2. Rotating the investment capital from monetizing those debt positions into heavier equity weightings, particularly in Tech stocks; and
3. Chinese stimulus substantially buoying holdings in that country.

Active management combined with opportune timing led to our four model portfolios, which range in risk level from Aggressive through Conservative to generate an average 3Q24 return of 9.5%, ranging from Conservative’s 6.53% to Aggressive’s 13.61%. The following table offers returns figures for these portfolios for the 3Q24, Last 12 Months, 2023, 2022, and Since Inception periods. Notably, these figures each include our 1% annual management fee.

Indicative of the potential value of holding fixed income positions in risk-balanced portfolios, the +6.53% 3Q24 return for our Conservative Model Portfolio exceeded the all-equity S&P 500’s +5.87% return for the same period. As detailed in its section below this Conservative Model Portfolio allocated 65% of its investment capital to debt securities. Cash also composes a significant portion – 15% – of the Conservative Model Portfolio.

Outsized upside volatility midway through 3Q24 afforded us opportunities to harvest substantial gains on several long-held positions in our portfolios. Also, downside intra-quarter volatility subsequently motivated us to buyback several of these holdings at large discounts to those sales prices and thus, to our estimated values for these holdings. First Solar (FSLR), Citizens Financial Group (CFG), and Chart Industries (GTLS), which we held at a double-weight position in our Aggressive Model Portfolio, proved to be particularly fruitful for holders last quarter.

The following two graphs illustrate the degrees to which 3Q24 performances moved our portfolio significantly higher as compared to 2Q24 and year-to-date metrics vis-à-vis both their respective benchmarks as well as the S&P 500. Late in 2023 we made a concerted effort to rotate portfolio holdings out of growth-oriented positions and into value-driven equity holdings and longer duration fixed income exchange traded funds (ETFs). While these efforts led to lower risk levels for each of the four portfolios entering 2024, growth equities, particularly Tech stocks, thumbed their noses at our value tilt and rocketed higher. As a result and as shown particularly in the “L12 Months” data of the right-hand table below, Solyco Wealth Model Performance suffered as growth-producing Tech stocks vastly outperformed our expectations.

The table below details Solyco Wealth Model Portfolios’ relative performances to that of their respective benchmarks. In our write-ups for each of the model portfolios, we detail the composition of these benchmarks:  the proportion allocated to stocks, bonds, and cash. We also convey details on the primary drivers of downside and upside performances for each portfolio.

Our models, by rule, contain a maximum of 32 total holdings, generally holding between 24 and 28 individual equities, three to six fixed-income exchange traded funds (ETFs), and a tactical allocation to cash. This limited number of holdings, representative of our level of conviction in our investment opinions, necessarily results periodically in substantial volatility (like in 3Q24) and deviation for returns vis-à-vis those of major indices, like the S&P 500 (such as year-end 2023 and earlier in 2024). Comparisons between returns for 3Q24, L12 Months, and Since Inception, periods quite effectively illustrate the impacts of periodic volatility. Again, each of these figures includes our 1% annual management fee.

Aggressive Model Portfolio

The Solyco Wealth Aggressive Model Portfolio, of which we allocate 80% to equity 17% to Fixed Income Exchange Traded Funds (ETFs), and 3% to Cash, declined 2.6% in 2Q24 In 3Q24, Solyco Wealth’s Aggressive Model Portfolio posted a very attractive 13.61% total, after-fee return. Heading into last quarter, we allocated 80% of Aggressive to equity, 17% to Fixed Income Exchange Traded Funds (ETFs), and 3% to Cash, which represented a measurable underweight to equities as relayed in the benchmark disclosure at the bottom of the table below. As previously discussed, midway through 3Q24 as fixed income markets moved higher and equities sagged we exited long-duration debt ETFs in favor of cheaper and more attractive equities. These activities resulted in the Aggressive Model exiting the quarter with a 90% equity weighting and only 7% in fixed income and 3% in cash.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 5.0% iShares Core US Aggregate Bond ETF (AGG), 45% MSCI ACWI ex-US ETF (ACWX), and 5.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

The largest contributors to Aggressive’s 3Q24 upside include:

• Independent power producer Vistra (VST), an intra-quarter addition to the portfolio:  +52.0%
• BioNTech (BNTX), a provider of mRNA-based drugs targeting communicable diseases and cancer: +47.8%
• Chinese e-commerce giant AliBaba (BABA): +47.4%
• Kentucky Fried Chicken and Pizza Hut franchiser in China, Yum China (YUMC): +46.7%
• VF Corp (VFC), parent company of Vans, North Face, and Dickie’s: +42.3%.

Notably, industrial Chart Industries (GTLS), a name held in Aggressive since our September 8, 2021, inception and at a double-weight, 6% level, spiked to $170 per share in late July. With a $170 price target for GTLS, we chose to sell shares into this upside move, only to witness the shares plummet back to the $110 level after reporting disappointing 2Q24 earnings and full-year 2024 guidance the first week of August. As the value proposition again appeared compelling at this lower price point we re-bought GTLS shares at a 3% weighting. We allocated the other 3% from our previous GTLS doubleweight to farm and construction equipment provider CNH Industrial (CNH), parent company of Case and New Holland brands. We executed a similar strategy to the benefit of Aggressive performance with Citizen’s Financial Group (CFG), which offered the portfolio a 29.9% upside bump over the quarter, albeit to a somewhat less dramatic extent than GTLS.

Comparing the magnitude of its upside performers to Aggressive’s overall 13.61% 3Q24 return means it was not all wine and roses for the model. Three holdings, including its two Energy positions, posted double-digit declines last quarter with a couple Industrial Tech companies also stinking it up:

• STMicroelectronics (STM), which provided microchips and microcontrollers to automotive and industrial manufacturers, declined 24.1%,
• Crude oil and natural gas producer APA (APA) moved 16.3% lower,
• Halliburton (HAL), which provides well construction and completion services to companies like APA, gave back 13.5% in 3Q24, and
• Sensata (ST), a look-alike to STM, dropped 3.8%.

To be honest economic data volatility leaves us a little perplexed entering 4Q24 and 2025 as to which direction the 11 sectors that compose the S&P might move. Our valuation-based discipline necessitated that we exit some favored holdings late in 3Q24 and early in 4Q24 (CFG, BABA, VFC) for which we have to identify worthy replacements. So we choose, for now, to sit on a little larger cash allocation than we typically would. With a plethora of data likely forthcoming from 3Q24 earnings season over the next few weeks we remain confident that we will identify attractive replacements and put this cash back to work sooner rather than later.

Moderately Aggressive Model Portfolio

The Moderately Aggressive Model Portfolio posted a +10.01% total return for 3Q24, pushing its Since Inception (9/8/21) total return to an attractive 28.85%. These figures resulted in comparisons to ModAgg’s benchmark of +6.01% for the quarter and +12.01% Since Inception. All of these figures include our 1% annual management fee.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 25.0% iShares Core US Aggregate Bond ETF (AGG), and 32.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

A 10% weighting and a 9.6% move higher in 3Q24 for the iShares 20+ Year Treasury Bond ETF (TLT) for the quarter translated that that holding being ModAgg’s biggest absolute upside driver: +1.25% on a weighted basis of the portfolio’s +10.01% total return. Joining the aforementioned BABA and BNTX to move the model higher were PayPal (PYPL), which appreciated 34.5% in 3Q24, as well as contributions from CFG and VST.

The same three culprits that clipped Aggressive’s performance provided headwinds for ModAgg as well:  STM, HAL, and APA. However, software leader Adobe (ADBE), which we anticipate ultimately being a substantial beneficiary of artificial intelligence investments, also moved to the downside (-6.8%) and hurt ModAgg’s performance, as did Walt Disney’s (DIS) 2.3% negative performance. Of the 40 positions held in ModAgg for any period in 3Q24, however, only seven moved to the downside.

Moderate Model Portfolio

With a 45% debt allocation and a 10% cash weighting, Moderate’s performance understandably lagged that of its far more equity-weighted sister model portfolios Aggressive and ModAgg. Notably, however, Moderate’s +7.85% total 3Q24 return still exceeded that of the S&P 500 (+1.98%) as well as that of its benchmark (+2.13%). Just as with ModAgg, only seven of Moderate’s 39 holdings over the course of 3Q24 were negative, meaning 84.6% of its holdings generated a positive return for the quarter.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 45.0% iShares Core US Aggregate Bond ETF (AGG), and 22.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

As a function of their outsized, 10% weightings TLT, the long-term Treasury bond ETF, and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) provided ModAgg’s biggest tailwinds to the upside as they, respectively, moved 9.55% and 6.04% last quarter. BioNTech, a 1.56% weighting in the model, contributed 79 basis points (0.79%) to Moderate’s +7.85% total 3Q24 return by virtue of its 47.8% move higher last quarter. Joining BNTX, PYPL, and BABA, as upside drivers on the equity side for Moderate were Real Estate Investment Trust (REIT) Realty Income (O) with a +21.7% move higher and Fiserv (FI; +20.5%), which provides digital payment processing technology all over the world.

Among the seven negative returns for Moderate in 3Q24 were cross-over holdings with the other strategies STM, APA, ADBE, and HAL. Interestingly, however, a look-alike (in our view, at least) to FI, Global Payments (GPN), which was an intra-quarter addition to Moderate, rounded out the top-five negative returns for the model as it moved 6.6% lower on disappointing commentary at its analysts’ day concerning its 2025 growth expectations.

Conservative Model Portfolio

An anomaly to say the least, Conservative’s 3Q24 return exceeded that of the S&P 500 as well: 6.53% vs. 5.87%. With a 65% allocation to fixed income ETFs, Conservative in no way, shape, or form is designed or managed to outperform the all-equity S&P 500, as exemplified by its massive underperformance versus that index since inception:  -23.37%. Nonetheless, we will take it as and when it comes!

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 65.0% iShares Core US Aggregate Bond ETF (AGG), and 10.0% MSCI ACWI ex-US ETF (ACWX), and 15.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).

Predictably, given their much more sizeable weightings in the Conservative Model, fixed income ETFS drove the portfolio’s upside last quarter:

• TLT’s 10% weighting resulted in a +1.21% weighted contribution with its 9.6% move higher;
• A 17.5% weighting to Vanguard Short-Term Corporate Bond ETF (VCSH) with a +3.8% return resulted in a +0.6% contribution;
• Similarly, a 17.5% allocation to Vanguard Short-Term Treasury ETF (VGSH) and a +2.8% return yielded a +0.5% contribution; and
• The 5% average weighting to LQD netted a 0.5% weighted addition as it moved 6.0% higher last quarter.

On the equity side of Conservative’s holdings, a 19.8% move higher for defense contractor Lockheed Martin (LMT) joined contributions from already-highlighted BABA, PYPL, O, and FI, to move Conservative higher.

To the downside Conservative suffered from underwhelming performances on the parts of STM, APA, ADBE, GPN, and DIS. From a weighted contribution standpoint, long-term holding TotalEnergies ADR (TTE), the Paris-based energy giant, joined the fray with a weighted negative contribution despite its 4.3% annual dividend yield.

Value Tilt Damages 2Q24 Solyco Wealth Model Portfolio Performance

Our lack of confidence entering 2024 in the Tech stock rally and a resulting aggressive tilt toward value stocks substantially impaired the performances of Solyco Wealth’s model portfolios in 2Q24. As relayed in the following table, each of our model portfolios posted a negative return last quarter, including our annualized 1% management fee. Poor stock-picking, which frequently saw winning picks sold too early in exchange for under-performing replacements, generally provided stiff tailwinds in the 2nd quarter as well as the first six months of the year.

Remaining disciplined with respect to valuation and diversification in a momentum-driven market did us no favors last quarter or earlier in 2024.  As was the case in 4Q23, upward revisions to earnings estimates following 1Q24 earnings failed to keep pace with the acceleration in stock prices for the first six months of the year. As the business press repeatedly highlighted as well, stocks outside the Tech sector largely failed to participate in the S&P 500’s 15.2% move higher in 1H24. International equities left much to be desired from a performance standpoint as well. Leading participants in the Artificial Intelligence build-out – many of which we previously held in our portfolios – may ultimately warrant their monumental price appreciation and lofty earnings multiples. However, we remain of the opinion that AI’s deployment ultimately must lead to significant and substantial productivity gains for the balance of the economy for these gains to remain sustainable. Our model portfolios remain strongly positioned to participate in a 2H24 broadening of earnings growth to sectors beyond Technology as well as the benefits of declining interest rates. The following graph from private equity behemoth Apollo shows just how concentrated 2024 gains have been for the S&P 500 and, as a result, how few stocks have been rewarded for earnings growth.

Supporting our thesis for broadening upside participation for non-Tech and non-AI equities is the forecasted 15.2% median 2024 earnings growth anticipated for our model portfolios stocks and a 42.9% average expected 2024 earnings growth rate. Estimates of 2025 earnings growth for these same point to an additional 11.1% median and 14.6% average rate of earnings growth. All of these earnings forecasts utilize Morningstar consensus estimates.

The exchange of 2Q24 high-flier First Solar (FSLR), a leading provider of solar panels, for NICE (NICE), an Israeli-based provider of customer relationship management software, encapsulates much of our 2024 experience. We sold FSLR out of our Aggressive Model Portfolio for a fine 64% gain in the quarter only to see it appreciate 30%+ from our sale-point over the ensuing few weeks. Meanwhile NICE shares declined 20% on what appeared to be an investor’s divestment of Israeli stocks but no fundamental news.

The table below details Solyco Wealth Model Portfolios’ relative performances to that of their respective benchmarks. In our write-ups for each of the model portfolios, we detail the composition of these benchmarks while relaying details on the primary drivers of downside and upside performances for each portfolio. Our models, by rule, contain a maximum of 32 total holdings, generally composed of between 24 and 28 individual equities and three to six fixed-income exchange traded funds (ETFs). This limited number of holdings, representative of our level of conviction in our investment opinions, necessarily results periodically in substantial volatility and deviation for returns vis-à-vis those of major indices, like the S&P 500. In 2024 these expected swings in volatility and returns worked decidedly against us, but not as much as they favored our portfolios and investors in 2022 and 2023. As the adage goes, “Most money is made not by timing the markets but rather by time in the markets.”

Aggressive Model Portfolio

The Solyco Wealth Aggressive Model Portfolio, of which we allocate 80% to equity 17% to Fixed Income Exchange Traded Funds (ETFs), and 3% to Cash, declined 2.6% in 2Q24 while moving 2.5% higher in 1H24. Aggressive’s 2Q24 performance lagged that of the S&P 500 by 680 basis points (6.8%) and its benchmark by 461 basis points. The equity allocation for Aggressive lagged the S&P 500 by 7.62%, or 762 basis points (bps), while the model’s 17% debt allocation trailed the Bloomberg US Aggregate Bond Index by 0.46%. Since its September 8, 2021 inception, however, Aggressive’s 22.3% total return, including fees, outpaced that of its benchmark by 742 bps while trailing the S&P 500, which carries a 100% allocation to equities, by 366 bps.  

The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q24 and 2.85% 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.

An accelerated move for DLocal (DLO), a digital payment services provider to Latin American and African merchants and consumers, most negatively impacted 2Q24 performance for the Aggressive Model Portfolio. Disappointing 1Q24 earnings for DLO saw the stock drop ~30% the day it released earnings and 45% overall for the quarter. We dollar-cost averaged into full weightings in DLO for our clients on this out-sized weakness, however, as we estimate this recently $8/share stock could be worth $30 per share on a reacceleration of earnings growth. Similarly, US healthcare behemoth CVS (CVS) saw its stock caught in a downdraft after Medicare surprisingly left its 2024 reimbursement rates unchanged from the prior year, leading management to downwardly revise anticipated future earnings. Chart Industries (GTLS), a provider of equipment for the liquefaction of natural gas (LNG) and flows of other industrial gases, which we carry at a double-weight 5.3% position in the Aggressive Model Portfolio, moved 12.4% lower last quarter. A Biden Administration decision to stay approvals of any future LNG terminals initially sent GTLS shares lower and they have yet to recover despite a consensus call for 1,000% earnings growth for ’24 over ’23.

Previously mentioned FSLR was the leading gainer for Aggressive in 2Q24, posting a +64% contribution. We sold it based on valuation discipline. Notably, while it moved 30% higher from our sale-point the stock also subsequently experienced the downside of the roller-coaster ride as it dropped 27% following the Trump-Biden Presidential Debate. Globus Medical (GMED), a provider of spinal and orthopedic surgical components, that moved up 28.4% in 2Q24 represented the 2^nd largest source of price appreciation for Aggressive in 2Q24. We chose to sell it in the quarter as well, also due to valuation discipline. Tech company Palo Alto Networks, an integrated cybersecurity services provider, appreciated through our $310 target price as it added 19.3% for the quarter. 

Looking to 2H24 we harbor the most positive expectations for price appreciation from Aggressive holdings in GTLS, Yum China (YUMC), DLO, and BioNTech (BNTX), which possesses several in-process clinical trials for which it expects results before year-end 2024. A turn in oil prices and our sentiment for the Energy sector would have positive implications for Aggressive as well as it retains 2.7% positions in oil and natural gas producer APA (APA) and oilfield services concern Halliburton (HAL).

Moderately Aggressive Model Portfolio

The Moderately Aggressive Model Portfolio posted a negative 2.45% return net of our annualized 1% management fee in 2Q24, trailing its benchmark by 474 bps. Poor equity performance created the most headwinds for ModAgg as its equity performance trailed that of the S&P 500 by 8.12%, or 812 basis points. Since inception, however, ModAgg remains well ahead of its benchmark – 830 bps – while trailing the 26.0% return of the S&P 500 by only 673 bps despite the fact that it retains only a 65% equity weighting.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q24 and 2.85% 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.

Technology stocks led our Moderately Aggressive Model Portfolio in 2Q24, accounting for four of the model’s top five performing holdings:

• Palo Alto Network (PANW): +19.3%
• Corning (GLW): +18.5%
• Adobe (ADBE): +14.5%
• TE Connectivity (TEL): +4.0%

Biotech Incyte (INCY) posted 4^th-best performance for the model in 2Q24 as it moved up 6.4%.

The biggest drag on ModAgg’s 2Q24 performance stemmed from the portfolio’s 2.3% weighting to Nike (NKE), which posted a woeful 19.5% drop last quarter on poor sales and lack of insight into any sort of near-term recovery for those sales. Medical device leader Zimmer Biomet (ZBH) declined 17.6% last quarter despite what we view as a relatively attractive environment for the elective orthopedic procedures from which the company primarily benefits. Also posting double-digit declines for ModAgg in 2Q24:  oil company APA, PayPal (PYPL), BNTX, GTLS, HAL, and Kraft Heinz (KHC).

Moderate Model Portfolio

Our Moderate Model Portfolio also posted a negative 2Q24 total, after-fee return as it dropped 1.93%, under-performing its benchmark by 394 bps and the S&P 500 by 618 bps last quarter. Weak contributions from Moderate’s equity holdings, which lagged the S&P 500 by 886 bps, 1,431 bps, and 1,519 bps, over the past 3-, 6-, and 12-month periods, respectively, substantially handicapped relatively positive comparisons for its 45% fixed income weighting versus the Bloomberg Aggregate Bond Index, shown in the bottom line of the following table. Since inception Moderate’s after-fee, total 9.5% return remains 2.0% ahead of its benchmark, however.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q24 and 2.85%  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.

Joining the aforementioned upside contributions from PANW, GLW, and ADBE, noted in our ModAgg commentary, Moderate, by virtue of 10% weightings to each, benefited from modest price moves higher for fixed income holdings in Vanguard Short-Term Corporate (VCSH) and Vanguard Short-Term Treasury (VGSH) ETFs. Citigroup (C), which we added at a 1.55% weighting early in 2Q24, also added a +3.9% contribution to the model in 2Q24.

Albeit at slightly lower weightings, Moderate experienced negative returns from the many of the same equities that plagued Aggressive’s and ModAgg’s 2Q24 performances:  CVS, NKE, APA, PYPL, BNTX, and HAL. Indicative of the negative impact imposed on longer duration fixed income securities from the lack of Fed rate cuts thus far in 2024, Moderate’s 12.5% weighting in the iShares 20+ Year Treasury Bond ETF (TLT) dropped 1.98% last quarter.

Conservative Model Portfolio

After assessing our 25 bps management fee for 2Q24, our Conservative Model Portfolio posted a -1.0% return for 2Q24, pulling year-to-date (YTD) performance down to +1.4% and performance over the past 12 months lower to +6.7%. Overall since its 9/8/21 inception, Conservative is up 6.22%, after fees, 422 bps ahead of its benchmark. This medium-term out-performance primarily stems from substantially better fixed income performance than that of the benchmark Bloomberg US Aggregate Bond Index (+510 bps).

The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q24 and 2.85% 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.

Palo Alto Networks, Corning, and Adobe, holdings also benefited Conservative Model Performance in 2Q24, with VCSH and VGSH also benefiting results as we allocated 15% of assets to each of these debt ETFs. Citigroup, defense concern Lockheed Martin (LMT), search leader Alphabet (GOOGL), Louisiana-based utility Entergy (ETR), and Chinese tech giant Alibaba (BABA), rounded out Conservatives positive contributors last quarter.

CVS, the long-term Treasury ETF TLT, NKE, APA, and PYPL, most negatively impacted returns for our Conservative Model Portfolio. Leather goods and clothing company Tapestry (TPR), which had its proposed combination with clothing and handbag concern Capri Holdings (CPRI) placed under review by the Federal Trade Commission, also moved 9.2% lower last quarter, hampering Conservatives returns in 2024.

Strong Equity Markets Lift Solyco Wealth’s Model Portfolios

As shown in the following table, the strong start for equity markets for 2024 significantly benefited Solyco Wealth’s four model portfolios and the investors which participate in them. Broadening of the stocks driving upside in March 2024 particularly aided performance as we substantially dialed back our portfolios’ growth exposure late in 2023, favoring an aggressive value tilt. Notably, each of Solyco Wealth’s four model portfolios retain significant cash and fixed income allocations that range from a combined 20% for our Aggressive Model Portfolio to 70% on a combined basis for our Conservative Model Portfolio. Individual stock holdings in 28 to 32 companies, balanced across the 11 S&P sectors, compose all of the equity exposures for our portfolios. Notably, we employ Morningstar Direct to generate all of the returns mentioned for our model portfolios and these figures each represent returns net of our 1% annual investment management fee.

We made valuation-based decisions to rotate out of well-appreciated growthy stocks such as Docusign (DOCU), ASML (ASML), Autodesk (ADSK), in 4Q23, and other momentum-driven names like Advanced Micro Devices (AMD), Applied Materials (AMAT), and CrowdStrike (CRWD), earlier in the year. We replaced these names with companies possessing similar operating profiles but less expensive price-to-earnings ratios, such as Qualcomm (QCOM), Nice (NICE), and NXP Semiconductors (NXPI), only to see the first group’s momentum accelerate while this second group also blew through our price targets. These Technology-levered components of our portfolio holdings more than carried their weight through February 2024. However, the next rotation into later cycle, industrial-levered Technology companies, like Sensata (ST) and ST Microelectronics (STM), has yet to enjoy anywhere near the upside posted by the Magnificent 7 or even the previously mentioned Tech stocks. In fact, these recent portfolio additions exhibit profiles similar to the more traditional “Value” holdings from the Staples, Materials, Utilities, and Healthcare, sectors that we added to our portfolios in 2H23. We continue to believe this rotation to value vs. growth will benefit our investors later in 2024 and in the medium- and long-term as we forecast the breadth of upside participation that commenced in March 2024 will accelerate throughout the rest of the year. However, the graphs below illustrate the near-term, 1Q24 underperformance that resulted from selling our “winners” early.

The table below, which relays Solyco Wealth Model Portfolios’ relative performances versus that of their respective benchmarks, which we detail the composition of in our reviews of each individual portfolio below, offers us confidence that our valuation discipline works over the medium- and long-term. Not only does each of our portfolios remain strongly ahead of its respective benchmark Since Inception, but their 2022, 2023, and Last 12 Months, comparisons also rank favorably.

Aggressive Model Portfolio

The Solyco Wealth Aggressive Model Portfolio, of which we allocate 80% to equity 17% to Fixed Income Exchange Traded Funds (ETFs), and 3% to Cash, returned 5.12% in 1Q24. This return lagged that of the S&P 500 by 540 basis points and its benchmark by 326 basis points. The equity allocation for Aggressive lagged the S&P 500 by 4.32%, or 432 basis points (bps), while the model’s 17% debt allocation trailed the Bloomberg US Aggregate Bond Index by 1.53%. Notably, we made a hard pivot towards longer duration debt exposure in January 2024 in anticipation of the Federal Reserve cutting interest rates that has yet to be rewarded.  

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q23 and 2.34% 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.

Since its September 8, 2021, inception, returns for our Aggressive Model Portfolio remain well ahead of both its benchmark (+1,291 bps) as well as those of the S&P 500 (+464 bps). In order to achieve diversified investment exposure, we employ a balanced investment process, allocating capital to each of the 11 S&P sectors since mid-2023, with an average position size of 2.9% for the portfolio’s individual equity holdings. Equity market dominance over the past 12 months by the Magnificent 7, which resulted in significant concentration, significantly handicapped short-term return potential for our investment philosophy. Decidedly, we expect this phenomenon to dissipate in the near future, much to the benefit of Aggressive’s value-oriented holdings and, as a result, its relative performance metrics.

Three stocks largely explain Aggressive’s 1Q24 relative underperformance:

• YETI Holdings (YETI), manufacturer of drinkware and coolers:  -25.6% in 1Q24,
• BioNTech (BNTX), developer of the Comirnaty COVID-19 vaccine, -12.6% in 1Q24, and
• DLocal (DLO), digital payments leader in Latin America and Africa, -8.8% in 1Q24.

In our judgment YETI and DLO fell victim to short-term sales and earnings expectations that belie the long-term potential for each company. While YETI dropped from $48 per share to $41 per share February 15th in response to reporting disappointing 2023 holiday sales, DLO similarly fell from $18 to $15 after reporting fiscal 1Q24 revenue that “only” rose 55% year-over-year. Shares of BNTX, which retains approximately 90% of its market cap in cash, suffer from the typical, biotech time-lag between clinical trial commencements and results; the company has 10 Phase 2 and 3 candidates in trials. Our valuations continue to illustrate that each of these companies offers significant upside.

In 1Q24 three stocks in the Aggressive Model Portfolio appreciated over 20%. Chart Industries (GTLS), which carries a double-weight, 5.91% allocation, moved 20.8% last quarter. While GTLS shares incurred some significant intra-quarter volatility related to a ban on liquefied natural gas (LNG) export facility approvals, realization that the company possesses a substantial backlog unrelated to this action along with a robust ongoing order book brought buyers back to the market. The aforementioned NICE, which is similar to a middle-market focused Salesforce (CRM) in that it provides Customer Relationship Management software and related services, moved 24.8% higher before we decided to sell it last quarter. Exhibiting the opportunity for stocks from the value universe to post substantial short-term price appreciation, seed and crop chemical provider Corteva (CTVA) from the Materials sector, moved 20.7% higher in 1Q24.

Moderately Aggressive Model Portfolio

The Moderately Aggressive Model Portfolio generated a 5.31% return net of our annualized 1% management fee in 1Q24, 302 bps short of its benchmark’s rate of return and 521 bps lower than the S&P 500’s 1Q24 return. Similar to the Aggressive Model Portfolio, ModAgg retained its long-term relative outperformance vs. benchmark (+1,383 bps) and the S&P 500 (+139 bps) since its 9/8/21 inception.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q23 and 2.34% 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.

As with the Aggressive Model Portfolio, shares of CTVA, GTLS, and NICE, also led upside realization for the Moderately Aggressive Model Portfolio. However, ModAgg and its investors had another holding appreciate in excess of 20% in 1Q24:  property and casualty insurer Travelers (TRV), likely benefiting from both a “hard market” for insurance premiums and escalating returns from its investment portfolios, moved up 21.4% last quarter.

Joining BNTX in detracting from ModAgg’s upside in 1Q24 were shares of sportswear behemoth Nike (NKE), which lost 13.1% of their value to start the year, and fellow biotech player Incyte (INCY), which generates the bulk of its revenue and earnings from blood cancer treatment Jakafi. We judge NKE’s problem relates to Chinese consumer weakness in combination with finicky US consumers. Time likely solves the first challenge while product innovation and marketing should remedy NKE’s opinion among domestic footwear and sportswear consumers. Impending applications for INCY’s dermatology drug Opzelura and ongoing clinical trials in the oncology space should rectify the stocks’ medium-term underperformance.

Moderate Model Portfolio

As one would anticipate in a weak fixed income market, as the magnitude of debt exposure for a portfolio increases its absolute performance declines. This relationship certainly held true in 1Q245 for the Moderate Model Portfolio, which allocates over one-half of its capital to debt securities and cash, as it posted only a 2.5% total return net of fees last quarter. This 2,5% return lagged the equity-only S&P 500 by 801 bps and Moderate’s benchmark by 331 bps. As shown in the table below, however, Moderate remains solidly ahead of its benchmark since inception as its equity allocation outperformed the S&P 500 by 938 bps while its fixed income holdings surpassed the Bloomberg US Aggregate Bond Index return by 317 bps over this time period.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q23 and 2.34%  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.

Along with shares of CTVA and TRV that also benefited our ModAgg Model Portfolio as discussed above, private debt provider Hercules Capital (HTGC, +11.6%) and e-commerce and cloud services leader Amazon.com AMZN, +17.3%) led positive returns for Moderate. With domestic economic strength, which decidedly aids returns from its equity holdings, leading to push-outs for rate-cut expectations, only two fixed income ETFs held in Moderate composing representing about a 20% allocation, posted positive returns. Characterizing lower interest rates, which should benefit existing bond holdings, as a “when” and not an “if” concern, we expect this 55% allocation to reap dividends for investors in our Moderate Model Portfolio.

Recently added automotive sensor and industrial microcontroller semiconductor provider, ST Microelectronics (STM), which promptly greeted addition to our model portfolios with a 7.6% dip in its share price, joined NKE and BNTX in providing headwinds for Moderate’s 1Q24 performance. As we expect the recent strength in US industrial production likely to persist through the balance of 2024, we expect better results from STM shares going forward.

Conservative Model Portfolio

Our Conservative Model PortfWith its 30% equity allocation doing all of the heavy lifting in 1Q24, the Conservative Model Portfolio posted a net-of-fees return of 2.4% last quarter. Over the past 12 months this debt-heavy portfolio generated a 12.6% return, 54 bps better than its benchmark. We remain especially proud of Conservative’s 382 bps of outperformance over the past 12 month vis-à-vis the 0.55% return of the benchmark Bloomberg US Aggregate Bond Index. Since inception our Conservative Model Portfolio, which returned 7.26% for that period through 1Q24, bettered its benchmark by 650 bps.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 4Q23 and 2.34% 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.

The Conservative Model Portfolio encompassed out-sized 1Q24 return contributions not only from previously mentioned CTVA, NICE, TRV, HTGC, TRV, and AMZN, but mega-bank JPMorgan Chase (JPM, +18.5%) and semiconductor equipment company ASML (ASML, +16.6%). Notably, the Vanguard Short-Term Corporate Bond ETF (VCSH) generated a positive contribution for the quarter, albeit small, as it moved up 0.54%.

The positive contribution from Conservative’s 15% weighting in VCSH served to offset a large portion of the negative return (-1.38%) from similarly weighted iShares 20+ Year Treasury Bond ETF (TLT). Also posting headwinds for Conservative last quarter were holdings in NKE, STM, and Chinese e-commerce leader Alibaba (BABA, -6.6%).

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?”

Bullish End to 2023 Lifts Solyco’s Model Portfolios

Significant price appreciation for risk assets through 4Q23 solidly benefited Solyco Wealth’s four model portfolios as well as its investors. The four models averaged a 6.88% return for 4Q23, contributing to an average full-year 2023 total return of 17.87% for the portfolios, each of which holds a mix of individual stocks and debt Exchange Traded Funds (ETFs). As shown in the following table and as one would expect, the Solyco Wealth Aggressive Model Portfolio led the way with an 8.05% 4Q23 positive return and a 27.63% full-year 2023 total return. All four of the model portfolios also posted positive total returns since their September 8, 2021, inception despite the predominantly negative performances for risk assets in 2022. Notably, the Aggressive model accomplished these returns with 15% of its assets allocated to fixed income ETFs and 5% dedicated to cash. Also of note, we present all of our model portfolio performance statistics, which we generated using Morningstar Direct, net of the 1% management fee we charge clients.

In 3Q23 and in early 4Q23, we decided to book gains from several of the portfolios’ growth-oriented holdings and to reinvest those sales proceeds into more value-driven equities. We anticipate in 2024 that broadening equity market upside participation beyond the “Magnificent 7” will disproportionately benefit these value stocks we added to the portfolios. However, these decisions led to 4Q23 underperformance for each of the four models as compared to their respective benchmarks as well as to the S&P 500. Longer term comparisons for the models, however, remained attractive as compared to not only the benchmarks but also to the S&P 500, as relayed in the following graphs and table.

Volatility in 2023 resulted in relatively peculiar quarter-by-quarter performance comparisons for Solyco Wealth’s Model Portfolios. For the two more conservatively allocated portfolios their debt-to-equity allocations substantially impacted comparisons whereas differential stock-picking from the Moderately Aggressive and the Aggressive models resulted in somewhat stark contrasts in returns. As shown in the last column of the table below for benchmark comparisons since Wealth’s 9/8/21 inception, these quarterly nuances largely play out over a longer period of time to narrower outperformances for the more conservative portfolios with widening positive spreads for the more aggressive models. The debt and equity weightings for our models range from a 65% fixed income allocation for the Conservative model to an 80% equity allocation for our Aggressive model, as detailed in the tables below.

Aggressive Model Portfolio

While the Solyco Wealth Aggressive Model Portfolio lagged its benchmark by 324 basis points (bps) and the S&P 500 by 359 bps in 4Q23, it retained impressive comparisons for longer term time periods, as shown in the table below. Generating a 27.63% total return for 2023 and a 19.16% total return since inception, Aggressive, after fees, remain +1.80% vs. the S&P 500 in 2023 and +9.83% vs. that index since inception. While a 1Q23 pivot to add credit and duration exposure to the 15% fixed income allocation led to 423 bps of out-performance vis-à-vis that of the Bloomberg US Aggregate Bond Index, in a very strong year for equities it, alas, would have behooved performance to have forgone any debt exposure in favor of more weighting to stocks.

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.

Three holdings of the Aggressive Model Portfolio appreciated 30%+ in 4Q23: DocuSign [DOCU (+33.33%)], Qualcomm [QCOM (+31.04%), and American Tower [AMT (+30.3%)]. For full-year 2023, the model benefited from out-sized returns from a 5.5%, double-weighting in oil and gas producer Earthstone Energy [ESTE (+37.93%)], which agreed to be acquired in 3Q23, as well as equal-weight positions in Advanced Micro Devices [AMD (+95.97%), Shopify [SHOP (+82.0%)], Splunk [SPLK (+69.4%), which also agreed in 3Q23 to be acquired, and Salesforce [CRM (+67.2%)]. Indicative of not only our rotation toward value in 4Q23 but also our discipline with respect to company valuations, QCOM is the only company of these eight holdings that remains in the portfolio. Notably, DOCU and QCOM replaced the SPLK and CRM positions we chose to exit in 3Q23. Among the other more value-oriented names we added to Aggressive:  Realty Income (O), Flour (FLR), Corteva (CTVA), and PayPal (PYPL). In response to Fed Chairman Jerome Powell’s relatively dovish comments concerning prospective future interest rates, we also added US solar panel manufacturer First Solar (FSLR) to the Aggressive Model Portfolio in 4Q23.

Moderately Aggressive Model Portfolio

DocuSign and American Tower holdings in the Solyco Wealth Moderately Aggressive Model Portfolio benefited investors in 4Q23 and in 2023, as did, for the first time since inception, a fixed income holding, Vanguard Tax-Exempt Bond Exchange Traded Fund (VTEB), which generated +7.3% in 4Q23 at a 7.5% weighting. These holdings led ModAgg to post a 7.3% 4Q23 total return as well as a 17.3% positive performance for full-year 2023. Joining AMD and CRM to aid full-year performance for the model were Amazon [AMZN (+80.9%)], Hercules Capital (HTGC (+41.8%)], and Alphabet [GOOGL (+58.3%)].

While Moderately Aggressive stayed well ahead of its benchmark and the S&P 500 for the 2-year and Since Inception time periods, it lagged these comps in both 4Q23 and in 2023. Negative performances from lithium miner SQM [SQM (-35.9%)], BioNTech [BNTX (-29.7%)], and fellow biotech Incyte [INCY (-21.8%)], represented the primary culprits for ModAgg’s underperformance. In attempts to make up ground on 4Q23’s lagging performance, in 4Q23 we added shares of clean energy industrial concern Chart Industries (GTLS), Salesforce look-alike NICE (NICE), and semiconductor equipment company ASML (ASML) to the portfolio.

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.

Moderate Model Portfolio

Indicative of a “turning of the tide” for fixed income in 4Q23, three fixed income ETFs generated the largest positive contributions for Solyco Wealth’s Moderate Model Portfolio last quarter, albeit with weightings for each in excess of 10% of the portfolio. At a 15% weighting Vanguard Tax-Exempt (VTEB) moved 7.3% higher last quarter while the 10% weightings in each of iShares iBoxx Investment Grade (LQD) and Vanguard Short-Term Corporate (VCSH) moved up 9.9% and 4.1%, respectively. These holdings drove 248 bps of outperformance for Moderate’s fixed income weighting as compared to that of the Bloomberg US Aggregate Bond Index.However,last quarter shares of Halliburton [HAL (-10.3%)], Alibaba [BABA (-9.4%)], and BorgWarner [BWA (-10.9%)], each hampered Moderate’s performance, leading the model to lag its benchmark by 279 bps for 4Q23.

For the full-year 2023 Moderate benefited inordinately from its Technology holdings, which included AMD, Applied Materials [AMAT (+44.5%)], Arista Networks [ANET (+43.7%)], and Microsoft [MSFT (+40.7%)], as well as Tech-like holdings in AMZN and GOOGL. Healthcare proved to be Moderate’s hobgoblin in 2023, however, as underperformance from BNTX was joined by that of health insurer Centene [CNC (-9.5%)] and pharmaceutical retailer and health insurer CVS [CVS (-5.9%)]. Our rotation to value in 4Q23 led us to add to the Moderate Model Portfolio shares of Tyson’s [TSN], Realty Income [O], PayPal [PYPL], and Qualcomm [QCOM], which we anticipate will improve the 236 bps of lagging performance Moderate booked for 2023 vis-à-vis its blended benchmark.

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.

Conservative Model Portfolio

Our Conservative Model Portfolio, which carries a 65% weighting to fixed income as well as a 15% cash allocation, returned 5.57% in 4Q23 and 12.28% for full-year 2023. While Conservative’s 4Q23 performance lagged that of its blended benchmark by 201 bps, the model remained +73 bps vs. its benchmark for full-year 2023, primarily as a result of 223 bps of out-performance vs. the Bloomberg US Aggregate Bond Index. As shown in the table below Conservative’s 2-Year and Since Inception performances continued to compare well with its benchmark, the aforementioned bond index, as well as the S&P 500 on a risk-adjusted basis as the returns to the 20% equity allocation of the model exceeded those of the S&P 500 by 1300 bps since inception.

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.

Joining VTEB, VCSH, and LQD to propel Conservative higher in 4Q23 was another fixed income ETF, Vanguard Short-Term Treasury [VGSH], which moved 2.5% higher last quarter but at a 25% weighting in the model. On the equity side Conservative enjoyed positive contributions from AMT and AMZN, as well as from JPMorgan Chase [JPM (+18.2%)], Eastman Chemical [EMN (+18.2%)], and The Traveler’s Companies [TRV (+17.3%)]. The gains from these holdings, though, were partially offset by headwinds from BABA, BWA, and Cisco Systems [CSCO (-5.3%)]. In 4Q23, we added ASML and O shares to the Conservative model as we removed AMT and Autodesk (ADSK).

For the full-year 2023 private debt provider Hercules Capital [HTGC (+42.8%)] at a 2.6% weighting led Conservative higher, joined by positive contributions from the 25% weighting to VGSH and 15% allocations to VTEB and to VCSH. Equities AMD, AMZN, and GOOGL, also offered upside with the portfolio retaining shares of AMZN and GOOGL into 2024.  As with other models, healthcare presented difficulties for Conservative, which was marred by a 12.5% move lower for CVS as well as a -8.6% move backward for shares of Johnson & Johnson [JNJ]. Alibaba defined the 3^rd-worst performer for Conservative with its 1.12% allocation declining 8.1% last year.

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.