By Brant Walker, Chief Investment Strategist

“Now is always the hardest time to invest, especially when the market is exhibiting schizophrenic behavior.” 

This statement could apply to virtually any period in the last three-and-a-half years, starting with the impact of the COVID-19 pandemic and its associated disruptions. Before we take a look at the first half of 2023, it will be useful to review the market trends that have characterized this uncertain period and what they mean for current and forward-looking investing climates.

How we got here

The year 2020 started on a high note, with the S&P 500 index closing 2019 with a stellar total return of 28.9%. Then the potential gravity of the coronavirus became clear in February 2020. In five short weeks, the S&P lost 33 percent of its value, bottoming out on March 16th.

Around that time, the federal government began rapidly printing money to buttress businesses that had to shut down and employees that were ordered to stay home, many of whom lost their jobs. This infusion of cash buoyed the market, and stocks finished the year up 16.3%. 

The year 2021 was also an excellent time for stocks due to continued money creation and the wide distribution of COVID-19 vaccines, which helped restore a sense of normalcy and optimism. The S&P 500 index again finished strong, with a 27% gain for the year.

The following year, reality set in. The elevated money creation of the previous two years led to excess demand, driving inflation to a 40 year high of over 9%. The Federal Reserve reacted, perhaps belatedly, by raising interest rates from zero to where they stand today, at just over 5%. The stock market acted as it often does in a period of sharply rising rates and dropped, tumbling 19.5%. 

2023 so far

After a brief but steep stock market loss in early 2020, followed by two years of strong returns, and another significant downturn in 2022, where are we today after the first two quarters of 2023? To date, the market has done another about face by returning close to 15 percent. Schizophrenic indeed.

We are dealing with an unusual combination of data points that will need to be carefully monitored and addressed as 2023 unfolds. First, the yield curve has been inverted for well over a year, meaning short-term interest rates (think money market funds and bank CDs) are higher than longer term interest rates. In normal times it would be the other way around. 

Money funds now pay close to 5% and some short-term CD’s can be had for 5.5%. Long maturity U.S. Treasury bonds are yielding under 4%. This is due to the Federal Reserve trying to slow the economy and raise unemployment to get inflation back down to the 2% range. 

Despite this effort, the economy remains resilient. The national unemployment rate is near a 40-year low, and inflation remains stubbornly above 2%. Fiscal policy in Washington is also hampering the Federal Reserve’s intention of lowering inflation, as government spending and new social programs continue to pour money into the system. 

It may take more time than anticipated to get inflation down to target, and this is a risk to the markets — both stock and fixed income. Hence, we are approaching the second half of 2023 in a cautious stance.

The impact of AI

We also feel it is worthwhile to spend a few moments on artificial intelligence (AI). Some say the growing capabilities of AI have the potential to change the world, similar to the invention of electricity and the automobile. Time will tell, but we do know that a handful of technology stocks that are on the forefront of AI have appreciated rapidly due to current hype and their possible future potential. 

The situation is similar to market behavior in 1999, when the internet was still in its infancy. Anything labeled internet, and any company that had .com attached to its name, soared in value. There’s a reason this trend was referred to as the “dot com bubble,” though. In March of 2000, the highly touted tech stocks came back to earth. Some took years or decades to recover to their 1999 highs. Some have never recovered.

The bubble also allowed a handful of companies to dominate the tech sector and drive the majority of market returns. A similar trend is happening today, with six stocks accounting for most of the year-to-date market return in the S&P 500. We don’t know exactly how the AI cycle will play itself out. History doesn’t always repeat,but it often rhymes.

Year-over-year market changes

The benchmark S&P 500 stock index has returned 19.6% for the year ending June 30, 2023. The benchmark iShares Core US Aggregate bond index ended the same period in negative territory, logging a -3.5% return. These returns are in stark contrast to calendar year 2022, when the S&P 500 logged a negative total return of 18.1% and the iShares Aggregate bond index lost 14.6%. 

Usually, one would expect bonds to act as a buffer when stocks fell as much as they did in 2022. In calendar year 2022, both stock and bond markets began, in retrospect, at levels that would prove to be highs for the year. Both markets plummeted in sawtooth fashion before reaching their lows on or around November 1. 

This was caused by the Federal Reserve lifting short-term interest rates from essentially zero to the 5% level that is prevailing today.  Early in 2022 most market participants expected interest rates to stay near zero or increase on a much slower trajectory than what has actually happened, causing stocks and bonds to plummet. 

Stocks have staged a strong recovery since last November as the market has become more comfortable with interest rates at 5% and the economy remains resilient. In addition, the labor market remains strong, and the unemployment rate sits near historic lows.

Economists have been predicting an economic recession for the better part of a year based on the “inverted” yield curve, where short-term interest rates are higher than long-term rates. Inverted yield curves often presage economic recessions as the Fed attempts to slow economic activity and cool inflation. Some market pundits have quipped that this is the most widely predicted recession that never happened, at least up until now.

Year-end forecast and expectations

Market performance in the back half of 2023 depends on several variables which are yet to unfold. The first and most prominent factor will be how far the Fed increases its interest rates before the economy and inflation cool to acceptable levels. Recent reports show the economy remains resilient, inflation is still too high, and job creation has been surprisingly strong. 

Elevated government spending based on recent bills passed in Washington is complicating the Fed’s action to slow the economy. Common stocks are highly valued based on historical standards, particularly with short-term interest rates above 5% and potentially headed for 6%. 

We may have to “thread the needle” in the back half of 2023 for the markets to remain resilient. Meaning inflation, the economy, and the labor market will need to cool without triggering a deep recession. We suspect the second half of 2023 may be more challenging than the first half.

By Ken Russell Jr.

Successful entrepreneurs are unique individuals with an affinity for risk-taking behavior that assists them in building their wealth. However, some of these very same traits can become a detriment to maintaining the assets they’ve created. There are three key characteristics that can often turn successful entrepreneurs into unsuccessful investors:

Control: Entrepreneurs, especially those who found their own companies, are known to be extremely controlling people. After all, they’re trying to bring their own vision to life and take the reins of numerous aspects of their business. Even if they employ others who assist them in running their company, the entrepreneur is the final arbiter of virtually every material business decision. 

When an entrepreneur is accustomed to being the decision maker on so many financial considerations involved in running a business, they’re often less willing to cede control of their investment decisions. They might also be overconfident in their own abilities, leading to the problems attendant in emotional investing.

Concentration: Doing one thing, and doing it extremely well, is frequently the key to entrepreneurial success in the United States. A concentrated focus on “owning” your business space is a proven path to growth.

While this focus is highly beneficial in running a business, it can lead to problems when entrepreneurs try to manage their own investment decisions. An entrepreneur may be an undisputed expert in the operations involved in providing a service or bringing a product to market, but that won’t often translate to an ability to navigate the complex issues involved in investing.

Use of Leverage: Entrepreneurs usually invest some of their own capital to start or expand a business, but they also tend to rely heavily on financial leverage. “Using someone else’s money” is an excellent way to increase the return on one’s own equity ownership in a business, as it preserves a founder’s personal capital, serves to spread some of the financial risk to either lenders or note holders, and supports the growth of the business.

Leverage can also strongly influence an entrepreneur’s approach toward investing, and it may be difficult to break this behavior later. They may be willing to favor a more conservative approach to avoid losing their own capital or the capital of their investors, but they may also favor a riskier approach when using borrowed money — a behavior which can carry over when investing personal assets.

From Entrepreneur to Investor

Now let’s say that a successful entrepreneur has reached the point where he or she is able to monetize their ownership in the business, perhaps through an outright sale or a significant distribution that transforms their illiquid investment into a fully liquid one. While this transaction can leave them with a sizable amount of capital, the characteristics noted above can significantly impede their ability to maintain or grow their assets.

For example, many years ago, my team and I visited with a nationally known businessman that had just sold his company for a significant amount of money. My team pitched him and his family on our investment process and a host of other wealth preservation services. His response was something along the lines of, “What you do sounds fabulous, but if you did that my sons would have nothing to do!”

He proceeded to trust his sons with the management of his wealth. Over the next decade, their poor decision making had cut the value of his portfolio in half. 

While it may take some time to accomplish, entrepreneurs can abandon the characteristics that made them successful in business when weighing their investment options. This will significantly increase the chances that they can sustain and grow their assets. Here are some tips on how to do so: 

Cede control and heed a financial advisor: Here’s the hard reality: while you may have been a professional business owner when you were running your company, you will be using an amateur advisor if you try to manage your liquid wealth by yourself. It’s akin to leaving the management of your company to an intern when you go on vacation. 

When you use a financial advisor, you’re still directing the strategic goals of the investment process. However, you’re ceding control of the day-to-day portfolio management process to professionals, who will be taking steps to ensure the sustainability of your money for decades.

Less concentration, more diversification: The business concentration that created your wealth in the first place will jeopardize it if you remain concentrated after you’ve acquired more liquidity. Sticking with what you know can be a form of risk mitigation when operating a business. Following this same strategy in public equity investing can be a fatal flaw.

Take steps to diversify your investments as soon as possible. For example, if you receive stock as part of the sale of your company, sell it as soon as your holding period requirements are met. If you’ve made your money in the private healthcare or services sector, don’t over-invest in the public side of those sectors when your wealth becomes liquid. 

Leverage your time, not your money: The use of borrowed money is an excellent return on investment optimizing strategy when running a business. But the continued use of margin debt in an equity portfolio is an unnecessary risk-taking behavior. 

To be sure, there may be occasional – and temporary – reasons to apply leverage to a portfolio if it involves optimizing the timing around tax deferrals or cost basis changes. But the continued use of leverage in an attempt to enhance portfolio returns – or fund one’s lifestyle – can have disastrous outcomes for your liquidity at the worst possible time. 

I’ve been in this industry long enough to witness unforeseen market events in 1987, 1998, 2000, 2007, and 2020. These events generated countless margin calls which decimated investor portfolios. 

An unleveraged portfolio has the ability to wait out equity market downturns. A nervous lender does not afford a leveraged portfolio the luxury of time.

To learn more about how a financial advisor can help you invest the wealth you’ve created through your business, contact Grey Ledge Advisors at 203-453-9075.

Investing in the stock market offers numerous opportunities for profit, but it also carries inherent risks. Market participants have used two popular investment approaches — the contrarian and trend following strategies — to try to enhance profits and minimize risk, to varying degrees of success.

In this blog post, we’ll explore the merits, drawbacks, and intricacies of each approach, providing insights for investors seeking to make more informed decisions in their pursuit of long-term success. We’ll also look at real-life examples of these strategies in action, including the pitfalls and challenges associated with each approach.

The Contrarian Approach: Seeking Value in Unloved Stocks

Contrarian investing involves seeking out-of-favor stocks with low valuations, as they often have most of the negative factors already priced in. While this approach may sound simple in theory, it requires a keen eye for detail, patience, and the discipline to execute an investment effectively.

Strengths: Contrarian investing can uncover hidden gems in the market, as undervalued stocks may offer significant growth potential once their true value is recognized by the broader market. This approach can also lead to lower portfolio volatility due to its focus on fundamentally strong companies trading at discounted prices.

Pitfalls: Identifying true value in out-of-favor stocks can be challenging, and investors must be prepared to weather disappointments and potentially prolonged holding periods. For instance, AT&T and Verizon are businesses that, on paper, appeared to be great contrarian investment opportunities due to their low valuations. However, the negative price action ultimately proved justified due to managerial overspending and a continuing decline in revenues. These cases illustrate the importance of being meticulous about which businesses you select for contrarian investing.

Example: Unilever, which underperformed due to the management’s search for a “purpose” for their brands, resulting in a price multiple difference between the European conglomerate and its US competitor Proctor and Gamble. Contrarian investors saw potential in Unilever’s valuable brands and the involvement of activist investors. Today, the company has caught up to P&G — and significantly outperformed this competitor — as it has focused on profit, changed its business divisions, and announced an external CEO with a great track record of growing brand-oriented businesses, who will be taking over in July 2023.

The Trend Following Approach: Riding the Momentum of High-Performing Stocks

Trend following investors seek to capitalize on the momentum of stocks with strong price performance, trusting that better-performing companies will continue to outperform their competitors. This approach requires investors to buy and hold more expensive stocks, often in the face of market noise and short-term fluctuations.

Strengths: Trend following can generate significant returns when executed well, as market leaders often continue to deliver strong performance over time. This approach can also benefit from the compounding effect of reinvesting gains into high-performing stocks.

Pitfalls: The trend following approach carries the risk of entering positions too late or failing to exit before a trend reversal. Additionally, trend followers may be prone to herding behavior, driving stock prices to unsustainable levels and creating market bubbles. In such cases, investors who do not exit in time may experience significant losses.

Example: In the beginning of the last decade, Apple began to outperform and grow bigger than Nokia, the leader in smartphone manufacturing at the time. Apple’s stock price became very expensive as it factored in a higher market share for phones, and many investors fled for less expensive Nokia shares. True trend following investors stayed invested in Apple, which dominated the smartphone industry over the next decade.

Strategies for Success in Contrarian and Trend Following Investing

To maximize the potential benefits of these investment approaches, investors should:

1. Develop a clear understanding of their risk tolerance, investment goals, and level of expertise.

2. Conduct thorough research on the companies they invest in, analyzing fundamentals, competitive position, and management quality.

3. Stay informed about market trends, economic indicators, and geopolitical events that may impact their investments.

4. Regularly review their investment portfolio, rebalancing and adjusting positions as needed based on changing market conditions and individual circumstances.

By considering these factors and understanding the potential pitfalls of each approach, investors can make more informed decisions and increase their chances of achieving long-term investment success.

At Grey Ledge Advisors, we believe that a successful investment strategy cannot be bound by a single approach but should rather be adaptive to various market environments. Our investment philosophy is rooted in a holistic blend of contrarian and trend following methodologies, allowing us to take advantage of opportunities across the full spectrum of market conditions. We strive to take a nuanced, opportunistic view of the market landscape, considering both the potential undervalued gems and the high-performing trendsetters in our decision-making process.

By integrating these complementary approaches, we aim to balance risk and reward, seek consistent returns, and ultimately, strive towards fulfilling our clients’ financial goals.

By Brant Walker

Like most processes, investment decisions moved more slowly in the pre-Internet days. When I started my investment management career nearly 40 years ago, a bank or analyst would send you a report through the mail — a multi-day process in itself — and you’d spend a day processing it before making your choices.

Today, anyone trying to invest on their own is being bombarded by information from all sides. Between 24-hour news networks, business news websites, social media chatter, and the ability to track a stock’s performance literally minute-by-minute, it can be difficult to choose how to proceed.

This noisy environment has only heightened the emotional aspects of investing. There has been extensive research into “behavioral finance,” or how human psychology affects investment decisions — often negatively. By better understanding this concept, you can put more trust into unbiased indicators, building your portfolio based on impartial information rather than gut feeling.

How emotions affect investment decisions

Many emotions come into play when you invest your money. You may be anxious about meeting your financial goals, excited to see your portfolio grow in value, eager to find investments that will produce a huge return on investment, nervous about market downturns, or depressed when an investment decision turns out to be a poor one.

Emotion-driven decisions can occur at any time. Some examples include:

However, emotion has the biggest impact on the market during periods of prominent gains or losses. During a strong market, people are more likely to underestimate risk, be overconfident in their own abilities, and chase after popular investments. During market downturns, people are more likely to panic and sell off investments in an effort to limit losses.

There are also several cognitive biases that affect investment decisions. One of the most common is confirmation bias, where people only consider evidence that supports their investment decisions and ignore other data, such as warning signs that a stock might be overvalued. 

Anchoring bias is also a common factor that influences investment decisions. This occurs when you measure the performance of an investment on some irrelevant point of reference, like the price of a stock when you purchased it or a stock’s previous peak value. 

Greed and fear

Greed and fear are the most powerful emotions affecting investment decisions. Greed spurs people to pursue higher gains by making riskier decisions, taking chances on speculative stocks, and pursuing short-term gains. Fear is the dominant option during bear markets or more volatile conditions, causing people to favor lower risk investments with smaller yields.

Concerns about losing your hard-earned money are a particularly potent factor in behavioral finance, leading to something called loss aversion bias. This occurs when a person gives priority to minimizing losses on their investments instead of actively pursuing gains. 

Loss aversion bias can lead to considerably different investment decisions. Since people tend to be more risk-averse when faced with a positive income, they might sell a well-performing stock too early out of fear that its value might go down. Conversely, they may also engage in riskier behavior in an effort to avoid losing money, such as doubling down on a declining investment in hopes that it will recover.

Optimism and pessimism

Market trends drive the broader emotions of optimism and pessimism, which also tend to cause people to make buying or selling decisions at the exact opposite of the optimal time. When the market is on the upswing and stock values are rising, people are optimistic and more willing to buy. When values are declining, people are more pessimistic, less willing to buy, and more willing to sell the stocks they have in an effort to avoid losses.

You might notice that these decisions directly contradict the classic “buy low, sell high” investment strategy.

Two recent market downturns show how a pessimistic outlook can impact your investments. Tumbling stocks during the Great Recession drove investors to pull their money from the market, only for stock values to grow steadily over the next several years during the economic recovery. There was a similar response when the stock market cratered at the start of the COVID-19 pandemic, with stock values recovering even faster.

Once more, without feeling

When investing your money, you should always take the time to research your options and avoid quick decisions. While monitoring the performance of your investments is important, tune out the noise and do periodic check-ups instead of frequent adjustments; this can help you retain focus on a long-term strategy instead of responding to short-term trends.

Other strategies to take the emotion out of investing include:

Working with an investment advisor will also help you avoid emotions when investing. This professional will provide you with unbiased recommendations and help you determine your goals and strategies.

By Scott Albraccio

Employees today have been inundated with statistics about outliving their 401(k) savings, and warnings that they need to start saving as much as they can, as soon as they can, to make sure they have enough to carry them through retirement. Life expectancy has increased as well, to 85 for men and 87 for women based on the most recent IRA actuarial tables, and this is also putting pressure on people to save.

There is an ongoing war for talent — employment levels are still low compared to pre-COVID numbers — and it is more important than ever for employers to offer a competitive benefits package to current and prospective employees. 

In this blog, I’ll share the most common pitfall employers face in setting up and managing their retirement plans, and offer insights on how you can create a competitive plan that will attract and retain employees.

Eligibility waiting period

I have had the opportunity to speak with many companies’ HR executives and review their retirement plans, and there’s one pitfall I see over and over again: the 12-month waiting period for eligibility.

This, unfortunately, is no longer acceptable to new hires. Any potential employee evaluating his or her employment opportunities is going to want to start saving for retirement as soon as possible.

Employers are more concerned about their employees’ long-term well-being, too. Some are scaling back the waiting period for retirement eligibility, allowing new employees to more quickly start saving and take advantage of employer matches. I’ve been advising companies to set a waiting period of no more than three months.

Auto-enrollment and auto-escalation

I see more and more plans being amended to implement auto-enrollment and auto-escalation for new participants. As the name suggests, auto-enrollment automatically signs up an employee to make a 3% contribution to a retirement plan while auto-escalation increases this share by 1% every year to a maximum contribution of 10%.

There are opt-out clauses if a participant does not want to contribute, and they have 90 days to request a refund of their deposits. This acts as a protection for the plan sponsor (the plan’s fiduciary) so the employee cannot accuse the sponsor of not making the plan available. 

Safe harbor match

Not offering a competitive “safe harbor” match can make you less attractive as an employer to
prospective employees. The basic match has always been 100% of the first 3% and 50% of the next 2% of compensation, for a total maximum employer contribution of 4%. I see more employers moving to 6%, in addition to a discretionary profit-sharing contribution.

The safe harbor match may also be an issue for your Highly Compensated Employees (HCEs). If your HCEs receive a refund of deferrals at the end of the year, you are most likely violating the testing your Third Party Administrator (TPA) is conducting. 

Qualified plans need to provide balance between your lower paid workers and your HCEs. There must be equality between the two groups representative of the percentage of savings vs. earnings.

Tax advantages

Depending on your type of business (small closely held or large employer) you have tax advantages related to the type of retirement plans you fund, defined contribution vs. defined benefit. You should consult with your TPA, CPA and financial advisor as to the best option given your situation.

SECURE ACT 2.0

The newly passed SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement) will mandate some of these options for all new plans starting in 2023 and 2024. It also offers tax credits to employers for matching contributions in newly established plans, and rewards participants with additional incentives.

The team at Grey Ledge Advisors can help ensure that you set up the best retirement plan for your current and future employees. Give us a call today at 203-458-5414.

The New Haven Business Journal has recognized Grey Ledge Advisors President and CEO Kenneth R. Russell Jr. as a member of their ‘Power 25’ list for 2023. The prestigious Power 25 for 2023 includes leaders from around the New Haven metropolitan area including New Haven Mayor Justin Elicker, Yale Ventures Managing Director Josh Geballe, and Yale New Haven Health CFO Gail Kosyla, among others.

“I am incredibly honored to be named among some of the most dynamic business and community leaders in our region,’ Russell said. “However, I don’t consider this recognition as a reflection of any personal accomplishment, but rather as the direct result of the Grey Ledge Advisors team and their extraordinary ability to find pathways to every client’s financial goals while providing outstanding client service.”

Read the New Haven Biz Journal Article here.

Financial planning begins with getting to know you, your family, and your current financial situation. We ask about your financial concerns and your goals for the future. The financial plan provides a roadmap for you to follow to achieve your financial goals. It is a living document that we review together regularly and update whenever you encounter life changes, such as a change in marital status, retirement, an inheritance, or sale of a business.

Preparing for the long term is a process that involves research and careful consideration of both your short and long-term goals. Our financial team can help you be more prepared to create financial strategies that best suit your situation and ensure long-term success.

A sound portfolio management strategy begins with asset allocation—that is, dividing investments among the major asset categories of equities (stocks), bonds, and cash. You can then make finer distinctions within each broad category. For example, within the equity category, you could diversify among large company stocks, small company stocks, and international stocks; and within the bond category, you could separate short-term and long-term bond investments. Since the various investment categories have different characteristics, they generally don’t rise or fall at the same time. Consequently, combining different asset classes can help balance risk and may improve the overall return of a portfolio.

The main objective of asset allocation is to match the investment characteristics of the various investment categories to the most important aspects of your personal investment profile—that is, your risk tolerance and your time horizon.

Investing according to your risk tolerance will help keep you from abandoning your investment plan during times of market turbulence. Finding an appropriate match means balancing your tolerance for risk against the different volatility levels of various asset classes. For example, low risk tolerance may dictate a portfolio that emphasizes conservative investments, while sacrificing the potentially higher returns that usually involve greater degrees of risk.

Asset allocation is more a personal process than a strategy based on a set formula. Building an investment portfolio that is right for you involves matching the risk-return tradeoffs of various asset classes to your unique investment profile. It may be prudent to consult with a financial professional to help determine the investment mix that is right for you.

Grey Ledge Advisors Summary and Outlook 2024

As the year comes to an end, we welcome 2024 and would like to share our current market views and present an outlook for the year ahead. There is no doubt that 2023 has been a year of immense events in areas such as Innovations (AI and GLP drugs), Markets, Interest Rates, and the Federal Reserve. We don’t expect 2024 to be a lackluster year either. Below we opine in detail on the above factors with respect to our view on their future expectations:

Innovations

AI (Artificial Intelligence)

We still can’t wrap our heads around the fact that Sam Altman CEO of OpenAI was overlooked as Time person of the year in favor of Taylor Swift. Although AI wasn’t invented in 2023, it was widely disseminated to the general public in the form of a chatbot by OpenAI, featuring their Large Language Model (LLM) known as ChatGPT. This was surprising to everyone, from professionals to amateurs. AI was dismissed before ChatGPT given the previous false starts of the technology and understanding and doing the work as, at best, average.

The first version of ChatGPT 3.5 could do the following:

The next iteration, GPT 4 (OpenAI ships products quickly, that is one reason the CEO was ousted) went one step further:

As this became clear, investors rushed in, adding a trillion-dollars in market capitalization to Microsoft and Nvidia, with the latter entering the trillion-dollar club. Significant investments were made in other semiconductor and software companies as well.

GLP-1 Weight Loss drugs

When FT’s person of the year 2023 was awarded to Lars Fruergaard Jørgensen, the chief executive of Danish firm behind Ozempic & Wegovy, some of our faith in humanity was restored. The advent of weight loss drugs is such a breakthrough moment in healthcare that there is a shortage of drugs even after almost one year of them being widely prescribed.

After 32 years in the making, the appetite-reducing hormone GLP-1’s version, semaglutide, was first approved for diabetes patients in 2009. In 2015, a weight loss drug was approved, but it only facilitated a 5% reduction in weight. It took scientists another 6 years and hundreds of millions of dollars in spending on clinical trials for current versions of the drugs to be approved. 2023 became the year when it became more than a celebrity fad drug with it going viral on Tik-Tok and Instagram with 1.3B mentions. The result was that two companies’ (Novo-Nordisk & Eli Lilly’s) innovation, primarily used for diabetes, changed the health industry’s landscape in such a way that its ramification will hit the lives of many people and companies.

The companies claim that along with 15%+ weight loss potential, there is a 20% reduction in heart attacks in overweight patients. A Greyledge Advisor’s team member, a user of the drug, explained the benefits go beyond weight loss. Hypertension, fatty liver, and other health vital signs have improved drastically after taking Ozempic for more than five months.

While investing in innovations might seem obvious, in reality, similar to other aspects of investing, it is more challenging. A few examples below summarize historical innovations and the wealth multipliers that went along with them:

  1. Amazon (E-Commerce, Internet): As a leader in e-commerce, Amazon has significantly outgrown the market cap of many other network providers (ATT & Verizon). Market Cap: Approximately $1 trillion.
  2. Coca-Cola (Beverage, Refrigeration): Coca-Cola, leveraging refrigeration technology, has a market cap that surpasses most other companies in the refrigeration industry. Market Cap: Approximately $250 billion.
  3. Facebook (Meta) (Social Media, Smartphone): Facebook has capitalized on the smartphone (Nokia, blackberry) revolution. Market Cap: Approximately $900 billion.
  4. ExxonMobil (Oil and Gas, Automobile): Benefited from the automobile’s popularity. Market Cap: Approximately $400 billion.
  5. Booking.com (Online Booking, Air Travel): Capitalized on the convenience of air travel. Market Cap: Approximately $122 billion (larger than all US air travel companies combined)
  6. Microsoft (Software, Personal Computing): A major software provider for personal computers. Market Cap: Approximately $2.77 trillion. Larger than all of the P.C. makers combined.

We believe the big winners from AI and GLP drugs are yet to be decided, apart from the first derivative winners, which are obvious.

While we believe there will be enormous productivity gains along with new functions emerging, the risk of Cyber-attacks on the cloud space are higher than ever. AI makes it easier for hackers to crack redundant security systems and gain access to computer and cloud networks for a ransom.

As recently as November 2023 the Industrial and Commercial Bank of China (ICBC) was hacked and had to pay ransom to regain access to email and other systems. This attack made headlines as it disrupted the most liquid treasury market in the world, which is essential for the financial plumbing that provides liquidity to institutions worldwide.

Number of incidents in 2023: 1,404
Number of breached records in 2023: 5,951,612,884
Source: itgovernance.co.uk 5th Dec,23

Cybersecurity companies, already growing at 25% year-on-year, will likely continue at this pace as companies scramble to prepare for new threats. While there will be other winners as AI develops, cybersecurity stocks are our special focus as they will benefit from a surge of companies scrambling to protect their data and networks.

The second derivative winners around the weight loss arena will be hard to predict, but recent trends show apparel, leisure brands and fitness focused companies already showing gains as traction of weight loss drugs increases. There may be more losers than winners from this transition as appetite for snacking and alcohol decreases, directly affecting loyal customers of fast-food chains, snacking companies and spirits producers.

Markets, Interest Rates & Federal Reserve

Markets today stand near all-time highs and interest rates are significantly lower after hitting a high of around 5% (10-year Treasury note) in October 2023. Markets often climb a wall worry and seem to be doing the same thing now. We all read in the news headlines that there are plenty of things to worry about. The S&P 500 is up 24% for the year after falling 19% in 2023. There were significant previous headwinds predicted which ended up not happening- e.g. the economy falling into recession. Other events could have caused a significant market downturn but didn’t – think the collapse of Silicon Valley Bank and the shotgun marriage of one the oldest financial institution in the world – Credit Suisse being absorbed by UBS, essentially dissolving the former.

Inflation halved in July, giving a significant boost to the market, coinciding with the Federal Reserve pausing interest rate hikes and leaving things on hold ever since. We witnessed inflation reaccelerating again in October along with crude Oil crossing $97/barrel as Hamas attacked Israel. As December arrived inflation cooled and is heading to the 2% level, while oil is below $70/barrel. The price of oil spiraling out of control due to the conflict in middle east has not yet materialized.

There was a meaningful change in the tone of Federal Reserve chairman Powell’s choice of words from December 1st to December 13th. Inflation numbers cooled, signaling a retreat from the hawkish stance stressing the need for “a significant period of tightening is needed” to “we are looking to cut interest rates in 2024”. This fueled a huge rally in the bond market as well as the equity markets as it sent a signal possibly drawing the curtains on tight liquidity.

While the exact reasons for the Federal Reserve’s change in stance remain unknown, speculation suggests that the Chairman did not want to risk a recession similar to what Germany is experiencing, especially as the U.S. enters an election year.

In our view, this significantly changes the dynamics for risk assets in 2024 from what has been to what could be. We agree in principle with the motto “never fight the Fed”. Recent robust growth of the economy (4.5% in Q3 2023) is expected to slow to 1.5% next year, side stepping any expected weakness as projected by the IMF.

The record unemployment rate coupled with continued federal spending and loosening of financial conditions as suggested by the Fed will play a significant role in returns for the new year.

Barring any financial accidents, we expect interest rates to fall further next year, thereby boosting both the income and capital returns of bond portfolios.

The stock market would benefit from a broadening of the rally with all other sectors joining the magnificent 7 stocks, which were the main driver of the returns in 2023.

Risks to above projections:

  1. All good news about the easing of financial conditions may have already been priced into the market and any negative inflation surprises would be harmful to the rally.
  2. Spending by congress could be jeopardized in January as the new speaker of the house presses for border security in exchange for more spending.
  3. Commodity prices start to accelerate once again.
  4. Growth of US economy slows below 1% as previous tightening of financial conditions start to weigh in with lagged effects.

As we look towards 2024, it’s essential for investors to approach the market with a balanced perspective of caution and proactive strategy. Monitoring shifts in monetary policy, keeping abreast of geopolitical changes, and understanding macroeconomic movements are critical for recognizing both risks and potential return areas. The general market outlook appears promising but being alert and flexible will be important in making the most out of the markets.

By Ted Reagle
​
​In December, Congress approved the SECURE Act 2.0 to enhance retirement savings. Here’s how those changes will affect your retirement planning.
 
Most notably, the age at which individuals must begin taking required minimum distributions (RMDs) from 401(k) or IRA accounts increases to age 73 this year. The age for initial RMDs has been creeping upward, reflecting the longer life expectancy seniors are enjoying. Just four years ago, the age for initial RMDs increased from 70 to 72; in 2033, it will increase to 75.
 
Furthermore, starting in 2025, the amount of the “catch-up” contribution for individuals ages 60 to 63 who are still working will increase 50 percent, from $7,500 to $11,250.
 
For this year, though, the maximum employee contribution to a 401(k) plan is $22,500, plus an additional $7,500 for individuals 50 and over. January is a great time to consider increasing your annual percentage contribution to your 401(k) plan to take advantage of the tax-deferred savings and power of compound interest to grow your retirement account over a long period of time.
 
Also in 2023, the limit on annual contributions to an IRA will increase by $500 to $6,500. The IRA catch-up contribution limit for individuals age 50 and over remains $1,000 in 2023. Hence, if you are over age 50 you may contribute $7,500 to your IRA this year. Starting in 2024, the IRA catch-up contribution will rise annually indexed to inflation.
 
SECURE 2.0 makes another interesting change related to 529 college savings plans. Individuals have the option to roll over up to $35,000 from a 529 plan (such as CHET) into a Roth IRA in the name of the student beneficiary. In order to take this step, the 529 plan must have been open for at least 15 years.
 
Find a better savings rate
If you have a significant balance in a savings or IRA account at a bank and are frustrated by the account’s low interest rate, you can set up a brokerage account to take advantage of the higher interest rates being offered on CDs and U.S. Treasuries. Presently, these low-risk investments are earning between 4 and 5 percent interest. Give us a call if you would like more information regarding putting your savings to better work.
 
Feeling the pinch of higher prices?
Like many families, we’ve been feeling the impact of higher prices on our household budget.  To keep our living expenses down, we started grocery shopping at a local discount grocery store and have noticed significant savings compared to the large grocery chains in our area. 
 
If you would like to reduce your living expenses, I encourage you to give a discount grocery store a try.  You may be pleasantly surprised by the selection, customer service, and (of course) the extra money you get to keep in your pocket.

To our clients,

The holidays are a time for giving, both to brighten our loved ones’ days and to give back to the community. Grey Ledge Advisors has decided to honor this spirit of giving this year by asking its employees to name the nonprofits they would like us to support with an annual donation.

We were excited to see which charitable causes our employees hold close to their hearts and touched by the stories they shared about why the selected nonprofits are important to them. Our employees recognized 13 organizations specializing in food security, health care, literacy, animal rescue, and other good work.

Funds will be distributed to:

A Place Called Hope, Killingworth
Branford Food Pantry, Branford
Chapel Haven, New Haven
Connecticut Foodshare, Wallingford
Dan Cosgrove Animal Shelter, Branford
Downtown Evening Soup Kitchen (D.E.S.K), New Haven
G.R.O.W.E.R.S., New Haven
Help Willy’s Friends, Durham
Kid-U-Not, Branford
Master’s Manna, Wallingford
New Haven Reads, New Haven
Paul Dostie Kare Foundation, Guilford
Toys for Tots

We’d like to extend our warmest appreciation to the employees who helped us identify ways to make our community a better place. To them, and to our clients, we wish a season full of merry rejoicing and happy festivities.

Sincerely,

Ken Russell
President & CEO
Grey Ledge Advisors

Follow our series of donations on Linkedin