News & Views

Tax-Loss Harvesting: Why and How

For taxable accounts tax-loss harvesting may be the most valuable portfolio management activity in which one can engage before year-end 2022. Depending on individual situations, the depth and breadth of asset market downturns this year probably offer numerous value-adding opportunities that tax consequences prohibited in prior years such as:

  • Reducing legacy and/or concentrated stock positions,
  • Rebalancing Tech-heavy portfolios for better diversification,
  • Eliminating undesired positions in favor of more favorable holdings,
  • Repositioning a growth-heavy portfolio to incorporate more value positions (or vice versa), and
  • Adapting exposures to generate more income.

Another “trick” that may accentuate the value of tax-loss harvesting, providing one starts early, is dollar-cost averaging. While many associate dollar-cost averaging with selling securities, the process also may add value exiting positions. Rarely is it better to take a larger loss and, as such, selling out of positions over multiple trading sessions could enable one to take advantage of short-term volatility. Similarly, redeploying generated funds into new positions over time, opportunistically taking advantage of downside volatility, could complement well dollar-cost averaging out of positions.

Consider the following cherry-picked example to illustrate the potential value of tax-loss selling for a portfolio with just a passing flavor of favorable timing. Assume an investor correctly read the Energy environment six months ago and decided to buy 1,000 shares of oilfield services company Schlumberger (green line in price chart below) in early April 2022 at $42 per share for $42,000. Concurrently, the same investor unfortunately decided to purchase at the same time 133 shares of Microsoft (red line) at $300 per share for $39,990. In mid-June 2022 our lucky investor analyzed the SLB move to $50 per share to be too much too soon and sold their entire 1,000 shares and booked an $8,000 gain. On their MSFT position our investor proved to be not so lucky as the stock moved to $244 per share just a few days after they sold their SLB; the investor chose to sell MSFT and created a $7,448 loss. However, from a tax standpoint this MSFT loss prospectively adds $1,788 of value to the portfolio as the loss almost entirely offsets the impact of the investor’s $8,000 SLB gain, providing our investor resides in the 24% tax bracket.   

Driving our cherry-picked example just a little further, this investor also could have benefited from repurchasing the same 1,000 SLB shares four months later at $33. To maintain the symmetry to our example, they also recently reestablished their 133-share MSFT position at $244. So, our investor now not only retains the same 1,000 shares of SLB and 133 shares of MSFT, but they also have $16,868 in cash with an estimated tax liability of only $132 (24% * the $552 in gains not offset by the MSFT share sale). Additionally, the 1,000 SLB position recently reflected ~$5 per share of appreciation, offering another $5,000 in paper gains, but…with no offsetting tax-loss. Overall, our investor hypothetically finds themself an estimated $5,420 better off with the same 1,000 SLB shares and 133 MSFT shares, but with $16,868 in cash, net of the $132 in estimated taxes payable.

Event Price Shares Value Running Cash Balance Running Gain/Loss
Initial Capital       $81,900 0
March 2022 SLB purchase $42 1,000 -$42,000 $39,900 0
March 2022 MSFT purchase $300 133 -$39,900 $0 0
June 2022 SLB sale $50 1,000 $50,000 $50,000 $8,000
   Possible tax liability @ 24% bracket     -$1,920 $48,080 $6,080
June 2022 MSFT sale $244 133 $32,452 $80,532 -$1,368
   Possible tax liability @ 24% bracket     $1,788 $82,320 $420
July 2022 SLB purchase $33 1,000 -$33,000 $49,320 $420
September 2022 MSFT sale $244 133 -$32,452 $16,868 $420
September 2022 MSFT sale $38 1,000 $38,000 $16,868 $5,420

 

Final Portfolio Price Shares Value
September 2022 SLB holiding $38 1,000 $38,000
September 2022 MSFT holding $244 133 $32,452
Cash     $16,868
   Realized gains     $552
   Tax liability     -$132
   Unrealized gain     $5,000
Total portfolio value     $87,320
Net realized and unrealized gains     $5,420

Trade or Trade Not

I got into this business over 20 years ago as an institutional equity salesperson for an upstart investment bank staked by a mid-sized bank. Although I was green as a gourd, I worked with seasonal professionals that had worked on the largest trading floors in the country. Compelling clients to trade with my firm and thus, generate commissions was the name of the game. Admittedly, I proved to be not very good at it, but I understood the motivation: trade. From an individual retail investor to the most sophisticated hedge fund trader the motivation to trade ultimately remains the same – to make a buck or a few million bucks. How do the drivers of trading differ, though, and how might recognizing the motivations to trade aid us in making more bucks (or losing fewer of them)?

As I reflect back on my past trading behavior in relation to the volumes of commentary and research I consumed on the topic over the years, five drivers to trade come to mind:

  1. Fear: something I own is declining in value and I fear it will continue to do so: time to trade out of it.
  2. Greed: more money typically is better than less money: buy it and then, sell it before it goes down.
  3. Overconfidence: the rest of the world just fails to understand: buy it or short it until everyone else realizes how right I was.
  4. Thrill: trading as pseudo-entertainment – it just plain feels good to be in on the action.
  5. Activity: the enticement of participating – action, action, we want action!

Undoubtedly, some of us get lucky and hit a 10-bagger and buy ourselves a great story to tell for years to come about some awesome trade we made. A recent Wall Street Journal article on Mark Spitznagel and his Universa Investments claim he made a billion dollars in a day during the flash crash several years ago. That is a story so good the notoriously reclusive Spitznagel chooses not to tell it!

Terrance O’Dean, a University of California at Berkeley Haas School of Business professor, more or less made his career out of trying to convince individual investors not to trade. He published numerous studies of individual investor trading activities with ominous titles like:

  • Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,
  • Just How Much Do Investors Lose from Trade, and
  • Boys will be Boys: Gender, Overconfidence, and Common Stock Investment

Despite admonishments to limit trading and stick to investing for the long-term from Professor O’Dean and numerous others, no-commission trades, meme stocks, and cryptocurrencies appear to have super-charged the drive to trade. Regardless of motivation, we suggest investors – traders or otherwise – follow a few simple rules as they go about their business:

  • Know what you own and why you own it, regardless of expected holding period;
  • If trading behaviors place making rent for next month in jeopardy, sell and seek counseling;
  • Keep the voice of your mother or another trusted, sage individual in the back of your head as you go about your trading. If they would call what your doing stupid/careless/unbelievable, reevaluate what it is you are doing in the context of greed, overconfidence, or just plain common sense.

Curiosier and Curiosier…Equity Markets May Get Even Sillier

The yo-yo path on which assets markets traded in 2022 finally bounced to the upside in July and early August only to traverse their downward trajectory – again – later in August and early September. Of late, Fed comments from Brainerd and Powell reinvigorated upside drivers with little more than recognition that increases in the Fed Funds Rate could push the U.S. economy into a recession. Sometimes knowing the problems half the battle…

Naysayers through the Late Summer 2022 bump in markets (bear market rally???) pointed to not only the probability, but the necessity for earnings forecasts to decline. Revisions, as shown in the following graphs from CS First Boston, commenced prior to 2Q22 earnings season as analysts updated estimates for the impending earnings announcements. Those forecasts for 2022, as shown in the left graph below, proved to be comparatively miniscule. The revisions to 2023, however, as conveyed in the graph below on the right, amounted to more than twice the magnitude of the revisions to 2022 earnings expectations.

We advise clients and investors look out for a few things as they parse out how Fed actions, economic activities, analyst earnings revisions, and company communications might impact asset markets:

  • Ongoing volatility that cuts in both directions, downward and upward, offering opportunities to:
    • Sell the peaks and buy the valleys,
    • Utilize options, if sufficient comfort and knowledge exists, to benefit from this volatility,
    • Exhibit confidence in assets owned and choose not to pay attention to the volatility.
  • “Sandbagging” from proactive company management teams that opportunistically utilize episodes of low and falling investor expectations to set a low bar which they subsequently clear amidst…
    • Unforeseen margin resilience brought on by unannounced
      • Hiring freezes,
      • Declining raw materials prices, and/or
      • Skinnier executive bonuses (I’m joking here)
    • Higher sales incited by increased promotions and/or advertising
    • Favorably managing inventories and other accounts subject to accrual accounting.
  • Straight-up gaming of the system to reduce expectations in a favorable environment.

The most effective way we found to manage through periods like this are to remain confident in assets owned and frequently to reinforce the reasons to own those assets. Distinctions in the drivers of reduced expectations matter in that structural issues like the loss of a major contract or significant declines in product/service quality may linger for much longer than more episodic challenges such as higher raw materials or labor expenses or reduced access to transportation and logistics solutions.

Leave ‘em Better Off

Few life events are as painful and undesired as dealing with the deaths of loved ones. Cleaning up the mess than many of these loved ones leave behind when they pass ranks as a close second, though. We recently spoke with a prospective client that lost multiple family members in a rather short period of time. First, in-laws died with no will and multiple properties in multiple states. Death of the spouse soon followed prior to probate closing. As it these events failed to create sufficient grief, the in-laws apparently never came across an item they did not want to keep: the propensity to hoard resulted in no less than five dumpsters of “stuff” being carried off from just one of the inherited properties. Creating positive memories after disposing of tons of unwanted “stuff” will challenge even the most gracious of us. Below, we short-list items that not only will leave your loved ones better off when you go, but also likely will aid the rest of your time with us.

  • Will – For goodness sakes, please create a will and leave your loved ones with guidance on what you would like done, who you prefer to do it, and what should happen with your “stuff,” after all is said and done.
  • Beneficiaries – Designate and/or review the named beneficiaries on your assets: life insurance policies, investment accounts, bank accounts, etc.
  • Insurance – Review policies for life, long-term care, disability, etc.
  • Clean up – Don’t leave others a mess. You wouldn’t like it if they did it to you.
  • Communicate – No one likes talking about their death or the deaths of loved ones. However, just as an ounce of prevention is worth a pound of cure, one difficult conversation could eliminate the need for many more down the road.

End-of-life care, whether it be medical, psychological, or even financial, presents a significant gap in the care continuum for many on each side of the situation. As a result already high levels of grief, anxiety, and frustration build when, probably, a large portion of this trauma could have been avoided with just a little planning and communication.

Still Work to Do for this Bear-Market Rally to Morph into a New Bull Market

Anything but a consensus view exists with respect to the probable future direction for stocks and bonds. To be sure, the latest two-month advance in risk assets caught more than a few bears by surprise. Short-covering almost certainly added frothiness to the July-August gains, but a 50% retracement of earlier 2022 losses provides a fairly solid base for positive momentum. For the lucky few that covered their short positions in the mid-June downdraft, though, post-2Q22 earnings season may offer an opportune time to re-short their most disdained stocks. After all, as the chart below from Yardeni Research shows, September historically provides the worst month for the stock market. What’s an investor to make of this environment?

Solyco Wealth continues to “ride the fence” with respect to choosing sides in this bear-bull tug-o-war. Starting six weeks ago we commenced over-writing much of our portfolios with covered calls that, generally, were at-the-money to +10% out of the money with respect to the underlying strike price. With early positive market momentum offering premiums of 1% to 2% for contracts of one month or less in duration, the risk-reward proposition appeared very attractive to us. In our view the option market still offers attractive risk management opportunities vis-à-vis company-specific medium- to long-term valuation forecasts and prevailing market conditions and, as a result, we continue to roll over most of these covered-call positions.

As we roll these options contracts, though, we remain hyper-cognizant of several key conditions that might signal conversion of this bear-market rally into a full-fledged bull market. We draw heavily on work performed by Ned Davis Research for this monitoring function. Key metrics include:

  • 90% of Russell 3000 stocks trading above their 10-day moving average (wide breadth of short-term positive momentum)
  • Advancing stocks outpacing declining stocks for the S&P 500 by a 2-to-1 margin for at least a 10-day period (persistent positive momentum)
  • Over 50% of Russell S&P 500 stocks setting new 20-day highs (ongoing duration of the move higher)

The strength of the move higher in a bear-market rally matters very little vis-à-vis the breadth and duration of the move higher. Markets threw investors more than a few head-fakes through the years with several past bear-market rallies in excess of 25%. The median gain for these largest rallies was 11.5%, according to Ned Davis Research, but with a median length of only 39 days before they fizzled.

As we view the other side of this fence we straddle, we also remain on the lookout for several phenomena crucial to gauging the probability of a swift and severe downturn. In our view downside data drivers likely will prove to be of a more fundamental nature than the obviously more technical characteristics we monitor for ongoing upside for markets:

  • Employment figures quickly deteriorating with resulting weakness in consumer sentiment and spending materializing
  • Inflation expectations re-accelerating to the upside which would imply the Fed will hike rates higher for longer
  • Corporate margins rapidly deteriorating faster than expectations due to labor, logistics, or raw materials pricing pressures (unlikely revenues decline in an inflationary environment)

Regardless of whether one views asset markets as in bear or bull phases, we counsel clients and investors to remain aware of the fact that attractive investment opportunities exist in all types of markets as well as through all phases of these markets. One need look no further than the 2022 price performances for the Energy and Utilities sectors and many of their component companies for evidence of this, as well as for several insurers and manufacturers.

Importantly, we maintain fundamental valuation discipline, particularly in frothy environments like we currently experience, and exit positions that look rich irrespective of the overall trend for risk assets. Notably, 11 of the 53 positions (20.7%) held across Solyco Wealth’s four model portfolios recently traded within 10% of our estimated values. We remain comfortable maintaining cash balances in excess of 10% in investment environments as volatile as that of 2022.

August Provides Prime Time for Financial Planning Review

The dog days of August offer prime time for financial planning and goal reviews. Sure, no one wants to consume vacation time with thoughts of budgets and investments and planning. The clearer heads that prevail when not consumed by work, however, provide optimal opportunities for focusing on such tasks. Maybe run through mental checklists while driving or sitting in the airport waiting for flight to board… work with me here: it will be to your benefit.

The review process need not be ridiculously time consuming and tedious. If it is, your process probably could use some help.  Please feel free to give us a call (713-444-3560), we are here to help. I recommend addressing three inter-related topics:

  1. Evaluate your budget
  2. Focus on your goals
  3. Consider you tax position

Just a guess here, but the unrelenting discussions of inflation omnipresent through the first half of 2022 likely impacted more than a few components of your budget. The costs of home ownership or rent, gasoline, and food almost certainly rose to levels significantly above expectations set earlier in the year. As a result of price escalations, savings and credit card balances may have suffered inordinately. Not to be a Negative Nelly and ruin your Bloody Mary buzz, but these could turn out to be big issues if the job market weakens later in late 2022 or in 2023 as the U.S. Federal Reserve continues to hike interest rates to curb that aforementioned inflation. Fail to plan, plan to fail – just sayin’.

My comments in the prior paragraph segue directly into this point: evaluate what changed from your last budgeting review to this assessment. Things likely changed for the good and the bad. If those two canceled each other out, “Hot dog!” order another Bloody Mary and quit reading. Higher probabilities exist that either “good” or “bad” outweighed the other through the first seven months of 2022. In this event what actions need to be undertaken before year-end 2022 to realign your means with your goals? Or, how do your goals need to be adjusted to improve your financial position and comfort level heading into 2023? Rarely do we suffer from poor planning when future events turn out to be better than our expectations. However, if 2023 underwhelms expectations how well positioned are you to attain peace of mind and endure until those rosier scenarios materialize?

Finally, it behooves one to complete at least one mid-year tax review to guard against surprises. A quick review of a paystub may confirm that deductions remain sufficient to avoid having to write Uncle Sam a check come April. Alternatively, a gap in tax withholding and a pay increase or mid-year retention bonus (good for you!) may present an opportunity to increase 401(k) contributions through the rest of the year or to open a Roth Individual Retirement Account (IRA). If you just go spend it, you keep driving more of that inflation that led this process in the first place, just kidding…not. Anyway, twenty minutes on tax planning could save you angst and a few thousand dollars down the road. I kid you not: a new client called April 10th last year to open an IRA after his accountant discovered insufficient tax withholding throughout the year. A quick review and the client could have leisurely pursued opening an IRA rather than hustling through the process and creating anxiety for himself and his wife. A little time here could go a long way later.  Happy August!

Big Week on Tap for Equity, Bond Markets

The week of July 25th not only is the biggest week for 2nd quarter earnings news, doubly important for showing how well (or not) companies fared through the tumultuous last three months as well as for how well they expect to do for the balance of 2022, but also for U.S. GDP performance for the last quarter and the Federal Reserve Bank’s decision on the degree it will increase its discount rate. Whew! This stacks a great deal of market-moving material in a compressed time period just before many take off for beaches, mountains, etc. for a much-needed August vacation.

Anytime this much news flow hits the wires volatility typically marks the only outcome forecastable with any degree of certainty. For those investors knowledgeable and comfortable using options to manage stock price volatility, weeks like this usually offer excellent opportunities to benefit from large premiums.

Even for conservative options strategies, such as overwriting core long equity positions with call options or employing cash-secured put options to either add to acquire long positions at lower price levels, we recently noted compelling premiums for select equities in Solyco Wealth portfolios. These premiums ranged from 1% to 2.8% versus near-money underlying stock prices with expirations less than one month away. Whether from the viewpoint of creating a synthetic dividend by writing a covered call or establishing a lower purchase price by selling a cash-secured put, we find such opportunities very compelling.

For more information on how Solyco Wealth may enhance your portfolios returns, please give us a call at (713) 444-2560 or drop us a message at ctrimble@solycowealth.com.  Thanks!

US Doing What it Can to Counteract High Gasoline Prices

High gasoline prices continue to plague efforts to lower inflation worldwide. The Russian invasion of Ukraine and the resulting sanctions prohibiting purchases of Russian oil substantially exacerbate tightness in world crude oil and petroleum product markets. As discussed below, markets dynamics foretold worldwide crude oil demand outpacing supply months before Putin’s ill-conceived attack. The Russia-Ukraine war and resulting market changes, however, wreaked such havoc on world markets that the US exported approximately 1.1 million barrels per day (Mmbpd) of crude oil and petroleum products on average over the past four weeks versus importing 343,000 barrels per day over the same four-week period a year ago. This ~1.5 Mmbpd swing to exports from imports represents a $20 per barrel to $30 per barrel swing in crude oil prices.

As shown in the following chart from the US Energy Information Administration, domestic crude oil inventories commenced declining rapidly in Spring 2021 (red circle). The prior six-week period, which saw significant additions to inventories of crude oil, marked the typical period of seasonal refinery maintenance when facilities shutdown and throughputs decline precipitously.

The graph below of US crude oil production exhibits a dip in flows from wells concurrent with refinery shut-in season, but with a corresponding rebound in production from 10.4 million barrels of oil per day (Mmbopd) in late March 2021 to well over 11.0 Mmbopd by July 2021. Production growth persisted until Fall 2021 when Hurricane Ida hit the Gulf Coast the final week of August, resulting in flooding and shut-in crude oil production. Unfortunately, demand growth persisted and crude oil inventories failed to recover through Winter 2021-2022, as shown in the above graph. 

Refineries, in order to meet burgeoning worldwide demand for gasoline, diesel, and petroleum products, only completed an amended turnaround in Fall 2021, as highlighted by the yellow circle in the following chart, negatively impacted by Hurricane Ida. As previously noted, this short turnaround for refiners offered no relief for the ongoing draws on crude oil production and inventories. This situation led to the initial increase in crude oil prices from the pre-Hurricane Ida $67 per barrel level to the $85 per barrel level in late-2021. Economically motivated, domestic US crude oil producers increased production year-over-year in 4Q21 to over 11.6 Mmbopd from 10.9 Mmbopd in late 2020. As shown in the above graph, these producers continued to increase production, albeit more ratably and conservatively than in earlier $100+ per barrel price regimes, to a recent 12.0 Mmbopd. Notably, oil drillers and oilfield services companies remained constricted by the same supply chain logistics snafus and lack of workers that complicated operations for much of the rest of the US.

Politicians and the popular press made much of declining refining capacity in the US. However, the above chart shows that refining capacity, again in response to high petroleum product prices, ran between 15 million barrels per day (Mmbpd) and 16 Mmbpd of throughput the entirety of the past 15 months, significantly higher than it ran over the prior year. Primarily in response to expectations for declining petroleum product demand, significantly higher expectations for alternative fuels and electric vehicles, and increased maintenance expenses, refinery throughput declined 8.6%, or 1.6 Mmbopd, from a peak of 18.0 Mmbopd in August 2018 to a recent 16.4 Mmbopd.

Very robust growth in gasoline and diesel demand brought on by the re-opening from COVID-related shutdowns, as shown in the graph above, combined with already very low crude oil inventories and long-term declines in refinery capacity provided a solid set-up for escalating crude oil and petroleum product prices months before Russia invaded Ukraine. With OPEC recenty producing 2.6 Mmbopd below its production goal in April and diminished spare production capacity, we do not see any quick fixes on the horizon other than conservation for high crude oil, gasoline, and diesel prices. In response to this opinion Solyco Wealth remains overweight the Energy sector, holding TotalEnergy, Schlumberger, Pioneer Natural Resources, Marathon Petroleum, and Earthstone Energy in its model portfolios.

Solyco Wealth Model Portfolios Endured 2Q22 to Maintain Outperformance Since Inception

While the 2022 downdraft for risk assets accelerated in 2Q22, the four model portfolios managed by Solyco Wealth remained, after fees, ahead of their benchmarks and the S&P 500 for seven of eight observations year-to-date (YTD) and since inception (SI). Year-to-date only the Conservative Model Portfolio, after a 0.50% fee, lagged its benchmark, doing so by 32 basis points (bps), or 0.32%. Performance after fees for all four portfolios– Conservative, Moderate, Moderately Aggressive, and Aggressive – exceeded that of the S&P 500 YTD led by the Moderately Aggressive Model Portfolio outdistancing the index by 809 bps, or 8.09%.

Stock-picking remained the driver of outperformance for Solyco Wealth across all time frames. The equity weightings in the portfolios, before fees, averaged exceeding the performance of the S&P 500 for the 2Q22, YTD, and SI periods by 32 bps, 397 bps, and 586 bps, respectively. Average returns for the fixed income holdings of the portfolios, by comparison, lagged those of the Bloomberg US Aggregate Bond Index by 336 bps for 2Q22, 103 bps YTD, and 47 bps SI, before fees.

Over the course of 2Q22, Solyco Wealth made very few changes to the four portfolios, consistent with the attentive portfolio management approach employed since the inception of operations on September 9, 2021. Across the four portfolios we reduced exposure to the Information Technology and Health Care sectors late in 2Q22, primarily by exiting positions in Taiwan Semiconductor, Humana, and Cigna, across the portfolios. Concurrently, we increased Industrials and Energy exposures with the additions of agriculture and construction equipment manufacturer Deere & Co. and petroleum refiner Marathon Petroleum. Over the course of more than three quarters of managing the portfolios, Solyco Wealth averaged making fewer than two changes to portfolio holdings per quarter. Holding approximately 30 total positions in individual equity and fixed income exchange traded funds (ETF) in each portfolio, Solyco Wealth remains committed to maintaining relatively concentrated, research-driven portfolios.

Conservative Model Portfolio

Returning (11.08%) YTD and (9.49%) SI after fees, the Solyco Wealth Conservative Model Portfolio YTD lagged its benchmark by 32 bps but exceeded it by 140 bps SI. As compared to the S&P 500, Conservative posted outperformances of 888 bps YTD and 575 bps SI. Equities in the Conservative Model led the S&P 500 across all time periods while fixed income ETFs in Conservative lagged the Bloomberg US Aggregate Index performance only in 2Q22, outperforming YTD and SI, as shown in a table on the following page.

Indicative of how poor 2Q22 was for stocks and bonds, only two holdings of the Conservative Model Portfolio posted positive contributions for the quarter: American Tower (+3.1%) and TotalEnergy (+0.5%). Amazon, down over 36% in 2Q22, defined the worst performer in the Conservative Model Portfolio. For the YTD and SI time periods Energy holdings Schlumberger and TotalEnergy remained the largest positive contributors to the portfolio as they have largely since inception.

Solyco Wealth Conservative Model Portfolio Comparative Performance: 2Q22, TYD, and Since Inception
    2Q22 Year-to-Date Since SW Inception
Benchmarks S&P 500 -17.41% -19.96% -15.24%
Russell 3000 -17.96% -21.10% -17.66%
MSCI All-World ex-US -15.85% -19.32% -20.92%
Bloomberg US Agg Bond -4.63% -10.35% -10.85%
Conservate Model Portfolio Portfolio -8.56% -11.08% -9.49%
Benchmark -6.38% -10.76% -10.90%
   +/- Benchmark -2.18% -0.32% 1.40%
   +/- S&P 500 8.85% 8.88% 5.75%
   +/- Equities vs. S&P 500 2.00% 3.88% 5.40%
   +/- Fixed Income vs. Agg -2.24% 0.31% 1.34%

The above table reflects a 1% annual management fee, or 0.89% since exception and 0.50% year-to-date through 6/30/2022. 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.

Moderate Model Portfolio

Returning (12.68%) YTD and (8.99%) SI after fees, the Solyco Wealth Moderate Model Portfolio outperformed its benchmark by 106 bps YTD and by 457 bps SI. As compared to the S&P 500, Moderate posted 728 bps of outperformance YTD and 625 bps SI. Equities in the Moderate Model fell below the S&P 500 in 2Q22 but led the index by 382 bps YTD and 797 bps SI. Moderate’s fixed income position lagged performance for the Bloomberg US Aggregate Index across all time periods: 287 bps in 2Q22, 60 bps YTD, and 3 bps SI.

Five equities in the Moderate Model Portfolio remained positive for the YTD and SI periods: Lockheed-Martin, Pioneer Natural Resources, Schlumberger, Traveler’s, and Vertex Pharmaceuticals. Amazon offered the stiffest headwind for Moderate’s performance. None of the eight fixed income holdings in Moderate offered a positive contribution YTD or SI, a testimony to the disastrous environment for that asset class thus far in 2022.

Solyco Wealth Moderate Model Portfolio Comparative Performance: 2Q22, TYD, and Since Inception
    2Q22 Year-to-Date Since SW Inception
Benchmarks S&P 500 -17.41% -19.96% -15.24%
Russell 3000 -17.96% -21.10% -17.66%
MSCI All-World ex-US -15.85% -19.32% -20.92%
Bloomberg US Agg Bond -4.63% -10.35% -10.85%
Moderate Model Portfolio Portfolio -11.46% -12.68% -8.99%
Benchmark -9.68% -13.74% -13.56%
   +/- Benchmark -1.78% 1.06% 4.57%
   +/- S&P 500 5.94% 7.28% 6.25%
   +/- Equities vs. S&P 500 -0.03% 3.82% 7.97%
   +/- Fixed Income vs. Agg -2.87% -0.60% -0.03%

The above table reflects a 1% annual management fee, or 0.89% since exception and 0.50% year-to-date through 6/30/2022. 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.

Moderately Aggressive Model Portfolio

Returning (11.84%) YTD and (7.15%) SI after fees, the Moderately Aggressive Model Portfolio after fees outperformed its benchmark by 388 bps YTD and by 810 bps SI. As compared to the S&P 500, Moderately Aggressive posted 812 bps of outperformance YTD and 809 bps SI. Across all three time periods – 2Q22, YTD, and SI – the performance of equities in the Moderately Aggressive Model exceeded that of the S&P 500, driving 907 bps of outperformance SI. While Moderately Aggressive’s fixed income position lagged performance for the Bloomberg US Aggregate Index by 381 bps in 2Q22, contributions from the asset class YTD and SI outdistanced the index by 20 bps and 154 bps, respectively.

Tech holdings Autodesk, Applied Materials, and Advanced Micro Devices, and Cable and Entertainment companies Comcast and Paramount, each declined by more than 33% SI for the Moderately Aggressive Model. However, oil and gas producer Pioneer Natural Resources and lithium and fertilizer concern Sociedad de Quimica y Minera each generated 60%+ contributions to the portfolio. None of the eight fixed income holdings in Moderately Aggressive, despite exceeding performance of the fixed income benchmark index for two of the three displayed time periods, offered a positive return for any of the 2Q22, YTD, or SI, periods.

Solyco Wealth Moderately Aggresive Model Portfolio Comparative Performance: 2Q22, TYD, and Since Inception
    2Q22 Year-to-Date Since SW Inception
Benchmarks S&P 500 -17.41% -19.96% -15.24%
Russell 3000 -17.96% -21.10% -17.66%
MSCI All-World ex-US -15.85% -19.32% -20.92%
Bloomberg US Agg Bond -4.63% -10.35% -10.85%
Moderately Aggresive Model Portfolio Portfolio -13.02% -11.84% -7.15%
Benchmark -12.14% -15.72% -15.24%
   +/- Benchmark -0.88% 3.88% 8.10%
   +/- S&P 500 4.38% 8.12% 8.09%
   +/- Equities vs. S&P 500 0.99% 6.40% 9.07%
   +/- Fixed Income vs. Agg -3.81% 0.20% 1.54%

The above table reflects a 1% annual management fee, or 0.89% since exception and 0.50% year-to-date through 6/30/2022. 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.

Aggressive Model Portfolio

The negative returns YTD (17.02%) and SI (13.58%), after fees, generated by the Solyco Wealth Aggressive Model Portfolio provide direct evidence of the abhorrent environment for investors in 1H22 as Aggressive still outperformed its benchmark by 168 bps YTD and 432 bps SI and the S&P 500 by 294 bps YTD and 166 bps SI. The 5% of Aggressive allocated to Fixed Income, equally divided between short-term high yield bonds and emerging market government debt, lagged the Bloomberg US Aggregate Bond Index by >400 bps YTD and SI. Performance for Aggressive’s equities, however, continued to outpace that of the S&P 500 by more than 1% in 2Q22, 6% YTD and 9% SI.

Although the 65.1% SI return for Earthstone Energy continued to pace the Aggressive Model Portfolio, that stock declined 28.5% in the final month of 2Q22. Oilfield services leader Schlumberger, a 30% positive contributor SI, similarly saw its shares give back 25.5% in June 2022. These moves lower substantially undermined Aggressive’s performance for all time periods. Sociedad de Quimica y Minera with a +64% contribution SI and Vertex Pharma at a +46.6% SI return, however, positively contributed to the portfolio, which needed it to make up for the horrendous performances of Shopify (77.3%), YETI (55.3%), Paramount (38.4%), and Comcast (33.9%), to start 2022.

Solyco Wealth Aggresive Model Portfolio Comparative Performance: 2Q22, TYD, and Since Inception
    2Q22 Year-to-Date Since SW Inception
Benchmarks S&P 500 -17.41% -19.96% -15.24%
Russell 3000 -17.96% -21.10% -17.66%
MSCI All-World ex-US -15.85% -19.32% -20.92%
Bloomberg US Agg Bond -4.63% -10.35% -10.85%
Aggresive Model Portfolio Portfolio -17.29% -17.02% -13.58%
Benchmark -15.44% -18.70% -17.90%
   +/- Benchmark -1.85% 1.68% 4.32%
   +/- S&P 500 0.12% 2.94% 1.66%
   +/- Equities vs. S&P 500 -1.66% 1.79% 1.42%
   +/- Fixed Income vs. Agg -4.52% -4.03% -4.18%

The above table reflects a 1% annual management fee, or 0.89% since exception and 0.50% year-to-date through 6/30/2022. 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.
Aggressive 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.

Not for the Faint of Heart: Trading Tomorrow

Tomorrow marks the rebalancing of the Russell Indices on which many domestic equity market participants base their sector weightings, stock selections, and overall portfolio exposures. Given not only the overall turmoil in equity markets to start 2022 but also the major drivers of this disruption, this rebalancing season probably will result in some highly peculiar trading activity to say the least.

This probable outsized volatility comes on the heels of rather hectic trading last week, 6/13- 6/17. Last week culminated with Friday’s “quadruple witching,” which describes a trading day when stock options, stock index options, single stock futures, and stock index futures all expire at the close of trading. The lead up to quadruple witching likely drove heightened volume last week as the 645+ million shares traded of the SPDR S&P 500 ETF Trust (SPY) represented a 61% increase over SPY’s cumulative trading for the prior week. Thus far this week trading lagged that of last week, but wait and see what happens tomorrow (Friday, 6/24).

Among the peculiarities we will experience this coming Friday:  Meta [aka Facebook (FB)], Netflix (NFLX), and PayPal (PYPL), making their way into the Russell 1000 Value Index. Substantially reduced weightings in the Russell 1000 Growth Index for these three companies offsets the move to the value index. While the combined market capitalization levels of these three stocks at ~$640 billion falls well below what it did to start 2022, this move along probably will generate a few ripples in trading tomorrow.

The Russell 1000 Value Index overall will see a relatively significant reweighting from Health Care to Communication Services, which includes FB and NFLX, as shown in the following table below. Logically, an increase for the Health Care sector in the growth index supplants a reduction in exposure to the Communication Services sector. The magnitude of investment capital dedicated to value strategies thus far in 2022 dwarfs that of growth, hence the index movement of the above-noted once high-flying growth names FB, NFLX, and PYPL (among others).

My advice to those not inclined to move quickly in and out of their stock positions or that have yet to generate well-defined and well-thought buy-and-sell lists. Don’t watch. If you choose to watch, give the likely inexplicable market moves at least a week to sort themselves out.  Thus far 2022 already offers among the weirdest trading years on record. Try not to make it any weirder by falling victim to the technicalities of index rebalancing that themselves are only adjusting to 2022’s weirdness.