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Harvest Rock Advisors, LLC

Solid Footing

The human foot is a remarkable machine.  It’s a complex anatomical network of bones – twenty-six in each foot to be precise, one-fourth of the entire human body - joints (thirty-three), ligaments (one-hundred) and muscles (nineteen). 

There’s no mystery about the cause of smelly shoes:  A quarter-million sweat glands in the feet can produce a half-pint of sweat daily; eight-thousand nerves explain why the foot is so darn ticklish.

Working in concert with the ankle, the foot is a work horse.  It absorbs 1.5 times your body weight with each step, five times your body weight when running. 

Like any machine, the foot requires regular care and maintenance that too many of us ignore.  My wife Carrie and I have been guilty of foot neglect in the past – and we’ve paid for it.

I personally learned the consequences of poor foot health by opting not to stretch my calf muscles for most of my adult years.  Who knew that good foot and ankle health starts with flexible, healthy calf muscles?  My ignorance led to a painful heel bone spur a few years ago that could return in the future if changes weren’t made.

Carrie developed a painful bunion from a lifetime of bad shoe choices that required a complicated surgery to repair (not a fun procedure or recovery).  

That’s just two of many foot ailments, which can contribute to other health problems, including back and hip troubles.  Gout commonly presents itself in the foot and toes, the pain from which borders on intolerable; I can attest.  Plantar fasciitis is another category of foot hell, often caused by human behavior, although arch deformities are a natural culprit.

Fortunately, owing to good arch support shoe inserts, regular stretching, exercises, better footwear and a little pill (gout), our feet are much healthier now.  I’m not yet ready to retire my flip flops, but they’re toxic for your feet and, sadly, I know their days are numbered.  

Podiatry is an odd non sequitur to talk about our 2024 investment outlook, agreed?  The weak linkage is the need for good “footing” within your investment portfolio to maintain a proper financial posture and stay agile in these uncertain times.

Finding the right investment posture is always daunting, but it seems especially so ushering in 2024.  Here’s the key drivers that will impact investment portfolios over the coming year:

  • Has the post-COVID inflation bout been tamed or is it just taking a respite?
     
  • Will the Fed Reserve cut short term interest rates several times as signaled?
     
  • Do bond investors roll over and readily finance another two-trillion annual government deficit plus refinance ten trillion of maturing debt without demanding higher rates?
     
  • Does the US economy experience a soft landing or hard (recession)?
     
  • Do the Russia / Middle East conflagrations escalate to world war?
     
  • Will the robust US labor market soften?

These variables are of course unknowable, yet they will drive investment outcomes.

Following two of the most bizarre investment years (2022 and 2023) in generations, we’re now focused on maintaining a solid portfolio footing, awaiting signals about these macro questions and then capitalizing on opportunities as they present themselves.

The re-emergence of cash as a viable asset class since 2022 has been helpful.  With short term credit vehicles yielding over 5% and the inflation pace under 4%, cash has financial appeal – for now.  For the first time in nearly two decades there’s not a penalty for holding cash and it should persist for much of 2024.

The flip side is that you can earn even higher yields owning investment grade credit.  It’s a great time to invest for income, even more so if inflation does moderate.

The pundit consensus is the recent sharp rise in short-term interest rates to a “high” level is causing great economic damage and will beget a recession in 2024.  Not so fast.  A 5% short-term rate with 3-4% inflation and a 4% ten-year Treasury yield are not “high” rates; they represent a return to normal.   

Actually, fifteen years of zero interest rate policy was “abnormal” and this misplaced monetary policy has caused many distortions and bubbles that are still unrepaired.

A minority believes the economy is adjusting just fine to normalizing interest rates and thus don’t expect a recession or a return to lower interest rates.   

Based on the tight labor market and unexpected resilience of the US economy despite tighter monetary policy, we’re leaning towards a softer-landing scenario in 2024 and a higher-for-longer Fed Fund rate.  If accurate, our ongoing portfolio tilt to floating rate, tactical and private credit over longer duration bonds will look smart.

The US stock market is now dangerously imbalanced.  The “Magnificent 7” mega cap tech stocks contributed an astounding 58% of the S&P500 total return in 2023.  That’s surreal and it’s a good time to trim those lucky 2023 profits and re-balance across other sectors.  Both small cap growth and value stocks are appealingly priced, especially if we dodge a hard economic landing.

We were admittingly late to the AI investment boom that started in 2022 but are now on board with the transformative impact AI will have on the global economy.   We’re still researching the best way to prudently invest in AI without throwing money at overvalued public tech stocks.

Looking abroad, foreign stocks remain relatively attractive - have been so for years - but it’s hard to invest there due to real geo-political risk.  China is a hot economic mess while other emerging market stocks look like long-term bargains, especially with a sliding future US dollar scenario.

Commercial real estate is nearly un-investable now.  The office sector is a slow-motion train wreck and most sectors are sluggish.  The exceptions would be single family home rental (housing crisis) and data centers (nascent AI phenomenon) – we like them.

If the laws of economics still function, the longer-term outlook for the US dollar value is bearish, but the prevailing geo-political risk extremes could continue to prop up the currency for a while.

Until next time, stretch your calves and be well…Tim

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