Adapting to Change: Resilience and Growth in Today's Investment Environment
Looking Beyond the Magnificent Seven
Over the past two years, the investment community has noticed that mega-cap tech stocks accounted for the majority of the market’s gains, and questions about market sustainability persisted.
Since earnings growth remains a primary driver for stock performance, companies like Nvidia, Microsoft, Google, and Amazon continue to showcase impressive gains, and Big Tech is poised for sustained growth, supported by wide moats, fortress balance sheets, and strong industrial and consumer demand.
However, it appears that the rest of the market is finally catching up. More generally, impressive earnings performances across sectors underscore the resilience of the overall market.
In particular, the energy, healthcare, and industrial sectors are emerging as strong performers. As earnings growth extends beyond the tech sector, investors may benefit from diversifying portfolios to mitigate concentration risk.
Additionally, dozens of companies in the S&P 500 boast robust cash reserves, potentially fueling stock buybacks, M&A activity, and dividend payouts. High levels of free cash flow indicate positive corporate health, with investments in technology infrastructure and supply chain reshoring poised to drive steady cash flow growth and healthy shareholder returns.
Despite potential headwinds from economic and geopolitical events, these sectors are supported by solid fundamentals and favorable macroeconomic conditions. Selective investment strategies and a focus on long-term objectives can help investors navigate uncertainties and capitalize on opportunities for growth in 2024.
How to Invest During an Election Year
Investing in an election year can be nerve-wracking, but it's crucial to maintain a steady course amid political turbulence. Benjamin Graham famously said that “In the short run, the market is a voting machine but in the long run, it is a weighing machine”.
Investors often attach excessive significance to election results, despite historical evidence showing minimal impact on long-term investment returns. The reality is that Presidents have limited influence over economic and market dynamics, and shifting investments based on election outcomes can detract from long-term gains.
To put things into perspective, consider this: If you had invested $1000 in 1933 and ignored eleven Democratic/Republican changes of presidency, you would now have $21,560,033!
Primary season volatility can unsettle markets, but it typically subsides once candidates are selected. While uncertainty may create short-term fluctuations, it also presents buying opportunities, especially in sectors targeted by policy proposals. Investors with a contrarian mindset can capitalize on undervalued stocks with strong fundamentals.
By adopting a disciplined approach and prioritizing long-term objectives over short-term fluctuations, investors can navigate election years with confidence.
Friendshoring - Investing with Friendly Neighbors
We are witnessing a significant shift in manufacturing dynamics as companies opt for "friendshoring" – outsourcing production to friendly neighboring countries. This strategy, accelerated by the disruptions of the COVID-19 pandemic and heightening tensions between the “Western” countries and the “BRICs”, aims to reduce geopolitical risks and diversify supply chains.
For American companies, Mexico has emerged as a top destination for friendshoring, benefiting from its proximity to the United States as well as historically favorable trade relations between both countries. Tesla's decision to build its first electric vehicle manufacturing plant in Santa Catarina, Mexico - a $5 billion investment - highlights the significance of this trend.
It is important to note that Tesla did not make this decision lightly: Mexico's strategic advantages include a skilled labor force, solid infrastructure, and access to inexpensive resources like oil and natural gas.
The Megatrends Driving Long-Term Growth
Innovation is one of the driving forces behind humanity’s sustained progress.
While bubbles can produce quick wins (and painful losses) and short-term crises make the headlines, staying invested in quality companies building foundational products is one of the keys to generating outsized returns over the long-term.
Here are three examples of deep structural megatrends that could redefine the global economy over the coming years:
AI-Powered Robots
The emergence of Chat GPT has truly revolutionized our appreciation of Artificial Intelligence’s disruptive potential.
However, while chatbots and generative AI are grabbing the headlines, the real disruption could lie elsewhere: collaborative robots, also referred to as Cobots.
Cobots are robotic arms that are used to automate repetitive tasks that were traditionally conducted by workers. They are designed to share a workspace with humans, increase the efficiency of automation, and help businesses of all sizes perform a wide variety of tasks across industries and verticals.
Companies like Amazon have developed incredibly advanced AI-powered cobots that can pick and pack millions of different Amazon items in mere seconds. Elsewhere, driverless cars, delivery drones, and ‘surgeon’ cobots performing very technical operations with high levels of precision are being developed, tested, and deployed.
Cell Therapy
For several decades now, the U.S. is known as being one of the developed countries with the highest obesity rates. Naturally, anti-obesity drugs are popular and selling. However, healthcare companies are working on revolutionary techniques that could transform medicine. One such area of focus is gene therapy.
Gene therapy involves the utilization of specific genes to address, prevent, or eradicate various diseases or medical conditions. Typically, it entails introducing additional copies of a malfunctioning gene or substituting a defective or absent gene within a patient's cells with a functional counterpart.
This approach has been employed to combat both hereditary genetic ailments such as hemophilia and sickle cell disease, as well as acquired disorders like leukemia. The significance of this innovation cannot be understated.
While firms such as CRISPR, Regeneron, and bluebird bio are actively developing various gene therapies, the technology is still in its infancy. Shrewd investors should carefully analyze opportunities before investing, but for early adopters, the potential rewards could be significant.
Agriculture
Technology and AI are also disrupting the agriculture industry, helping farmers grow crops more efficiently. The adoption of the Internet of Things, machine learning, geolocation and sensors are helping farmers make more informed decisions by providing advanced insights into optimal planting times, soil health management, efficient water usage, and pest control strategies. Ultimately, this optimizes crop yields and output.
Data reveals that precision agriculture can boost productivity by 30% or more, thanks to high-tech tools and access to accurate real-time data. The agriculture industry is currently being transformed with seed innovation, regenerative farming, and the development of alternative proteins.
Closing Thoughts
Despite ongoing uncertainties, investors should remain optimistic, vigilant, and adaptable, focusing on long-term objectives while navigating dynamic markets. Diversification, selective investment strategies, and an awareness of shifting geopolitics and emerging megatrends can guide investors towards opportunities for growth and resilience in 2024 and beyond.
We hope that you found this quarterly newsletter instructive and actionable.
As always, we remain at your disposal to discuss your investments and strategies in greater detail. Please reach out to schedule a meeting at your convenience.
All the best,
Your Wela Financial Advisory Team
P.S.
We are hosting a Shred Event at our office on Saturday, April 13th from 8-11 a.m. We would love to see you there! Stop by for a breakfast taco, cup of coffee, drop off some old papers, and be on your way. We hope to see you there!
Brent Forrest & Associates, LLC. dba Wela Financial Advisory (Wela) is a registered investment adviser. Information presented is for educational purposes only and should not be considered as specific investment advice. It does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.
