We mentioned in our May commentary that the main theme for the next bull market could very well be Artificial Intelligence (AI).   Although fundamentals and valuation metrics lead us to believe we are not yet in a new bull market, no one has told investors in AI stocks.  Many AI stocks have soared in the last month, and some have gone parabolic.  Direct AI stocks and those companies that use AI could be market leaders in the future, in our opinion.  So it is imperative that we participate in this group.  Even though some AI stocks are way ahead of themselves from a price perspective, we will be patient and add more key AI stocks if prices correct.  Our current equity portfolio allocation to stocks that will directly benefit from AI is 12-15%, and we expect that percentage to go up over time.

We have been telling clients in meetings or on phone calls for the last six months that we are getting portfolios ready for the next bull market. What does that mean?  How do you prepare for the next bull market?  Here is a summary of what we are doing in client equity portfolios:

  –      First, we are adding exposure to the more cyclical sectors, which includes financials, consumer discretionary, technology, and industrials.  Industrials don’t typically move until about halfway through a recession, but now is the time to buy them because of extremely low valuations, in our view.  Technology and consumer discretionary stocks have already been moving up.  Financials are also cyclical, especially banks.  We tend to own money-center banks, not regionals, because of their relative operating stability.  We find financial services stocks also attractive.

–      Second, economic sectors less cyclical are being deemphasized.  That includes consumer defensives, utilities and health care stocks.  Health care stocks are a diverse group because some stocks in the sector are defensive (for example, pharmaceuticals) and some offensive (biotech).

Because we have long holding periods for stocks, there is a limit as to how much we can or actually do.  We don’t like portfolio turnover.  So our changes are made at the margin.

TECHNICAL ANALYSIS OF THE STOCK MARKET IS

BULLISH BUT FUNDAMENTAL AND VALUATION CONCERNS REMAIN

Bears can’t deny that the technical aspects of the market are improving.  The worse enemy of a bear market is time.  After making a low, the longer the index goes without making another one, the more likely it is that the bear market has ended.  In the past when the S&P 500 declined 20%+ from a 52-week high (last year) and then went at least seven months without breaching that low (October 2022), performance over the following one, three, six, and 12 months has been much better than average and more consistent to the upside.

Also, both the S&P 500 and NASDAQ have broken above both their 50 and 200 day moving averages as shown in the graphs below.  Often stocks have more room to run after the moving averages are no longer resistance to higher prices.

 

 

Source:  Bespoke Investment Group

Next, semiconductor stocks, a leading indicator of the market, have regained strength.  The Philadelphia Semiconductor-Index (SOX) relative strength versus the S&P 500 has gone parabolic and is back near new highs as shown below.  Much of this is due to the surge in AI stocks, as many semiconductor stocks are seen as the “picks and shovels” of AI used by more and more companies.

Source:  Bespoke Investment Group

Breadth (advancing stocks compared to declining stocks) is improving.  Mega-caps are still leading the charge, but more and more stocks have been participating in the market advance.

Sentiment is improving but still decidedly bearish.  There is plenty of room for investors to become more bullish and push prices higher.

Before we appear to be too bullish, we are reminded that the market still has fundamental and valuation challenges.  We are still confronted with a tight Fed and a still probable recession in this year’s second half.  And valuations are now at 19x forward S&P 500 earnings.  How can a new bull market start from such a high P/E level?  Earnings would have to soar in 2024 and beyond.

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Real Retirement Solutions

designed to improve
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  • Management of Risky Assets
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This is achieved through an ongoing assessment of market risks given your specific financial situation and goals.

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Professional Expertise

Leadership Team

Richard Furmanski

Richard Furmanski

CFA

has been a portfolio manager and analyst for over 35 years. He manages conservative, tax-efficient portfolios for both pre-retirees and retirees. His lower risk approach appeals to investors who want less volatility and competitive risk-adjusted returns.

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Mary Ellen Adam

Mary Ellen Adam

Director of Operations

has been in office administration for over twenty years. Her experience includes customer service, firm operations, and office administration. She interacts with our clients on a day-to-day basis and handles any requests that may arise.

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Frequently Asked Questions

If you can't find the answer to your questions here, feel free to give us a call at 847-847-2505

Do you manage both stock and bond portfolios?

Yes. We build a portfolio of conservative, high-quality stocks and hold them for the long-term. The average holding period is 4 – 5 years. Our focus is on stocks that are suitable for retirement portfolios.

Our high-quality bond portfolios are designed to provide both income and stability of principal. Bonds provide the anchor for balanced accounts (those holding both stocks and bonds).

What is your investment philosophy?
We take great care in purchasing only high-quality stocks and bonds intent on a multi-year holding period. Portfolio turnover and taxable realized gains are modest in comparison to other active managers. We do not time the market but will become more defensive, in terms of stock holdings, when market conditions warrant.
Will the portfolio be managed in accordance with my financial goals?
Yes. Each of our clients has a custom-tailored portfolio. These custom portfolios are designed to meet specific client objectives with a thoughtful approach to specific constraints such as risk tolerance. And as each client’s situation changes, the portfolio does as well. There is no cookie cutter approach.
What kind of expertise do you have and how can that help me in difficult markets?
We have been working with high-net-worth clients like you since 1982. Over that time we have helped them to navigate several bear markets and financial crises (including the stock market crash of 1987). We hold the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations.
Are you sensitive to taxes when managing portfolios?
Yes. Our holding period for an individual stock averages 4 plus years which means our turnover is low and realized gains can be carefully managed. Further, where possible, we tax loss harvest small losses as a way of offsetting gains taken elsewhere in the portfolio.
How have you performed?
Results will differ by client and the level of customization but we have provided competitive investment returns for many years.
How do you charge for your services?
We charge a management or consultant fee based upon the size and level of customization of the account. As the account grows, we benefit together.

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