H1 2024 Portfolio Review - Echoes Of 2023, But Can They Last

seekingalpha07-01

A broad-based rally in the S&P 500 at the start of the year gave way to narrower leadership from the mega caps in May and June.My portfolio fell behind the market in May and June due to its ...

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It's hard and tax-inefficient to trade around these.   designer491/iStock via Getty ImagesMarket Recap The first half of 2024 went nearly as well as the first half of 2023 for the S&P 500, with the index ETF (SPY) returning 15.2% including dividends, compared to 16.8% in the first half of last year. Once again, leadership was narrow, with only 2 of the 11 sectors beating the average. As measured by the total return of the Select Sector SPDRS, Communications Services (XLC) returned 18.5% and Technology (XLK) returned 17.9%. The dispersion was not quite as wide as last year, however, as two other sectors managed double-digit returns: Energy (XLE) at 10.5% and Financials (XLF) 10.2%.   Seeking AlphaAnother four sectors had returns between 7% and 10%. Only one sector had a negative return so far this year, Real Estate (XLRE) at -2.5%, with Consumer Discretionary (XLY) and Materials (XLB) in low single digits.   Seeking AlphaGrowth outperformed Value even more than in 1H 2023, although most of this outperformance came in the last two months. The iShares S&P 500 Value Fund (IVE) returned 5.6% for the half year compared to 23.5% for the Growth Fund (IVW).   Seeking AlphaMarket cap was once again a big performance driver. The Vanguard Mega Cap Growth ETF (MGK) returned 21.3%, compared to only 5.8% for the SPDR MidCap ETF (MDY) and 1.6% for the small cap iShares Russell 2000 ETF (IWM). As with the other charts we've seen so far, the outperformance of the mega caps picked up during May and June.   Seeking AlphaWithin fixed income, investment grade bonds were impacted by increasing interest rates as the 10-year US Treasury Note yield (US10Y) rose from under 4% at the start of the year to 4.7% in late April before coming back down to 4.36% at the end of June. The iShares Core U.S. Aggregate Bond ETF (AGG) returned -0.7% in 1H 2024. The Investment Grade Corporate Bond Fund (LQD) returned -1.4%. Riskier segments of the bond market did better as their spreads narrowed vs. treasuries. High coupon rates were also a driver of return for these securities. The High Yield ETF (HYG) returned 2.3% and the Preferred ETF (PFF) returned 3.8%.   Seeking AlphaThe first four months of 2024 played out largely as I expected at the end of last year: modest but decent equity returns in the single digits but with broad participation from all sectors. This would be driven by a higher for longer interest rate environment with inflation slowly falling to 2%. This is not a bad thing for stocks if accompanied by decent GDP growth of 2% or higher. The Federal Reserve has come to believe this outlook, with the June 2024 projections showing 2.1% GDP growth, 2.6% inflation, and a 5.1% Fed Funds Rate (1 rate cut) in 2024. The Fed is now more in line with my outlook than they were in December 2023 when they were looking for only 1.4% GDP growth, 2.4% inflation, and a 4.6% Fed Funds Rate (3 cuts) in 2024. During May and June 2024 however, the market began to price in a slowing growth scenario with the falling 10-year rate over this period. The mega cap growth stocks outperform in this environment because they are considered the last stocks to cut growth forecasts and because lower interest rates make high future earnings worth more when discounted to present value. Can performance broaden back out in the second half of the year, or are we back to a 2023 scenario where we should just own the top 7 mega caps and forget about the rest of the market? While the mega caps are not excessively expensive based on earnings and growth, I am reluctant to believe they have to lead the market all the time. Also, the presidential debate has raised the possibility of a political change that causes value stocks and small caps to do better in the second half as they did in 2016. Portfolio Performance My portfolio was neck-and neck with the S&P 500 through April but fell back in the last couple months as mega caps outperformed. My total return was 8.2% in 1H 2024, underperforming the S&P 6.9%. My ending asset allocation was 78.0% equities, 16.2% fixed income and preferreds, and 5.8% cash. That marks a shift of 1.7% out of equities, 2.5% out of fixed income, and 4.2% into cash compared to the allocation at year-end 2023. As I will discuss below, I trimmed more positions than usual in the first half of 2024 and am satisfied to earn high rates on cash while waiting to redeploy these funds. As for investment income, I had a yield of 1.3% (non-annualized) in 1H 2024 based on starting portfolio value. This is higher than the 1H SPY yield of 0.7%. Higher cash balances helped to drive this yield, as well as dividend increases in stocks and closed end municipal bond funds. My portfolio income in total dollars was a healthy 18% above 1H 2023 levels. Looking forward, my projected yield for 2024 is now 2.9%, better than the 2.6% I expected at the start of the year. Largest Holdings My top 10 common stock holdings make up 56.5% of my total portfolio. I made no trades in any of the holdings currently on the list, except for reinvesting dividends. Since the end of 2023, Albemarle (ALB) fell off the list as the lithium market failed to recover from its big decline in late 2023. Carrier Global Corp. (CARR) is new to the top 10, but not to my portfolio. I have held it since the spinoff from United Technologies (RTX) and added to it in 2020 at much lower prices. The company is transitioning to a pure HVAC business, selling its fire, security, and refrigeration divisions. It is still valued attractively vs. peers even after its big increase in April.   Author SpreadsheetMy top 5 fixed income holdings now make up 8.8% of my total portfolio. Since year-end 2023, I have sold RLJ Lodging Trust Preferred Series A (RLJ.PR.A). I believe the 7.8% coupon is safe, but it feels late in the cycle for the hotel business, and the REIT has more debt than usual coming due in the next few years it will have to refinance at higher rates. I do not mind sacrificing a little yield to earn returns on cash while I look for other opportunities. Cash holdings, including money markets (SWVXX) are now a high allocation relative to my history, at 5.8% of the portfolio. I also swapped pairs of close but not \"substantially similar\" securities for tax loss harvesting purposes. I sold my full position in Nuveen Quality Muni Income Fund (NAD) and bought its AMT-free relative (NEA). All the leveraged Nuveen muni closed end funds are now overdistributing relative to earnings, so I will consider swapping into an unlevered fund when it looks like rates may increase again. I sold the portion of my Synchrony Preferred Series A (SYF.PR.A) that I bought for $25 around the IPO in 2019 and swapped into the recently issued Series B (OTC:SYF.PR.B). The newer preferred has a higher yield but has a coupon that resets every 5 years. I may look to swap back out of this well before the next reset in 2029 if it looks like rates will be lower. The Micron (MU) bond in 5th place is new to the list but not my portfolio. It is part of my bond ladder that now extends from 2025-2034 with similar size holdings maturing each year.   Author SpreadsheetTop And Bottom Performers My third best performer so far this year was Qualcomm (QCOM), with a return of 38.9%. I consider it a secondary beneficiary of the AI trend. The phone upgrade cycle this year is expected to be more robust than recent years as consumer demand is high for AI-enabled phones. Qualcomm is also getting into the PC market where a similar dynamic is playing out. The second-best performer was Western Midstream Partners (WES), up 40.7% YTD. I have been a fan of this midstream partnership for a long time with its positions in the Permian basin as well as Colorado and Wyoming. It appears the big dividend raise earlier this year finally got the rest of the market interested. The partnership now yields 8.8% and the distribution still looks well-covered by free cash flow. The best performer of 2024 so far has been Constellation Energy (CEG), returning 72.0% in the first half of the year. This independent power producer is in the sweet spot with growing demand for electricity in general with the growth of data centers. It also benefits from its predominantly nuclear focus, as government subsidies and customer demand favor power with zero associated CO2 emissions. The third worst performer of the year was Toro (TTC), down 12.6% before I sold it. The stock was hurt by a short seller's report featuring concerns about inventory build-up in the dealer channel. The company addressed most of these fears with their 2Q results and the stock recovered. Still, Seeking Alpha Quant Ratings for Toro have been bouncing between Hold and Sell with the current rating at 2.89. My sale looks like a mistake right now, but I agree with the ratings system that it is still expensive. I would consider getting back in in the $70s. The second worst performer was Warner Bros. Discovery (WBD), with a personal return of -23.9% based on my trade timing. I doubled my position in February at $8.44 but later did some tax loss harvesting, selling the shares I acquired before and in the spinoff from AT&T (T). I still trust management to turn things around and they have already demonstrated cost and debt reduction. They are still in a difficult business with a lot of competition, however. The worst performer of the year has been Albemarle (ALB), down -33.1% based on my trade timing. I got it wrong in March when I expected lithium prices to turn. Instead, they fell back to new lows in June, along with the share price. I sold my entire position in June at $96.10 along with a short-term holding in the preferred shares (ALB.PR.A). The shares are still a little below where I sold them, and I would consider getting back in around $87. The Seeking Alpha Quant Rating System is still bearish on the stock, with a Sell rating of 1.55. Special Situations I entered two special situation investments so far this year. The first was in CVR Partners (UAN), a Midwest US producer of nitrogen fertilizer associated with CVR Energy (CVI). The partnership became the subject of M&A speculation in March when large owner Icahn Enterprises (IEP) and CVI stated they would look at strategic options. Whether or not a transaction happens, the partnership is a high-yielding but variable dividend payer. Barring a huge collapse in fertilizer price which I think is unlikely, the partnership can continue to deliver forward yields around 10%. The second special situation was Paramount Global Corp. (PARA) which became the subject of takeover drama in the second quarter. Paramount's unusual share structure, with voting shares (PARAA) predominantly held by Shari Redstone through her National Amusements business ended up being an obstacle to a deal. Looking forward, Paramount will probably have to turn around its operations and improve its high-debt, low free cash flow situation before the stock will recover. I believe it is not as far along in that process as WBD, so I will probably wait to see some signs of improvement before selling PARA and swapping back into WBD. Other Trades I made more trades than usual in the first half of 2024, most of which have been addressed. Toro and Albemarle, while terrible over the past year, still produced large gains for me over the entire holding period. This triggered the tax loss harvesting moves discussed above. Time will tell if I would have been better of just holding these stocks and waiting for improvement. For completeness, the only other trades not already mentioned were two small ones. I day traded some options (synthetic short) in AMC Entertainment (AMC) during one of the meme stock spikes in May for a small gain. I also added to my position in an individual muni bond, Cleveland / Cuyahoga County Port Authority 3.125% due 2039 (CUSIP: 18610RCA0) at a price well below par. Lessons Learned Lesson 1 is \"own it, don't trade it\". This applies not just to Jim Cramer's positions in Apple (AAPL) and Nvidia (NVDA), but to any company with a decent track record and competent management over the long-term. The short report on Toro and the lithium price crash for Albemarle are serious issues that can impact share prices but might not be reasons to sell a long-term holding as long as there is a good chance of eventual recovery. It's hard to get out before most of the damage has been done and even harder to get back in at the right time before the market starts pricing in the recovery. Lesson 2 should be obvious but is important to restate for investors who pick individual stocks. The less your portfolio looks like the market, the less likely it is to have returns similar to the market over short periods. I saw this in 2022-2023, when I beat the market the first year, underperformed the second year, but had similar returns to the S&P over the two-year period. The lack of mega cap stocks caused this divergence then, as it did in April and May 2024. Instead of getting overly critical, it is worth remembering conditions could change and bring your style back into outperformance. Outlook I continue to expect decent economic conditions for the rest of 2024 similar to what I stated at the start of the year: GDP growth around 2% with inflation getting back to 2% but slowly. The Fed will likely follow their latest projection and cut the Fed Funds rate just once this year. Longer term rates could stabilize around current levels or even creep back up toward 4.5%-5% on the 10-year as the market begins to believe in a higher neutral interest rate. I don't like to let politics influence my investment outlook too heavily, as many expectations are quickly priced into the market. Unexpected trends can influence return, however. We saw this in 2016 as the market increasingly priced in a Republican victory in the second half of the year, then reacted even more after the November election on the prospects of lower taxes and less regulation. This helped small cap and value stocks outperform.   2016 Returns (Seeking Alpha)A similar setup could happen in the second half off 2024 with betting markets increasingly reflecting a Republican victory. This pattern could revert to the mean in 2025 and beyond as almost no politicians ever fully deliver the promises they ran on. However, through the end of this year, a portfolio like mine that is smaller-cap and more weighted to value could outperform. Appendix  A full list of my holdings as of 6/30/2024 is below:   Author Spreadsheet","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2448919257"}