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Retaining Conviction: Wrought Advisors’ Investment Portfolio Rebalance Thumbnail

Retaining Conviction: Wrought Advisors’ Investment Portfolio Rebalance

Financial Planning Investing Goals Risk Tolerance

Wrought Advisors’ Investment Portfolio Rebalance

Wrought Advisors’ portfolio management team has recommended a rebalance of our investment models and we have implemented these changes, as appropriate, across Wrought Advisors’ clients’ accounts.

The key changes:

  • Remain optimistic and two-percent overweight stocks with a firm U.S. bias but less overall active risk
    • Expecting a possible short-term “market breather” in Q1
  • Recalibrate growth/value factor positioning
    • Maintaining a targeted preference for tech stocks but unwinding other broad growth-oriented bets as value-centric 2023 losers potentially come back into fashion
  • Introduce exposure to actively managed factor rotation and income-focused strategies
    • Embedding enhanced sources of tactical security selection to potentially exploit greater dispersion in market returns
  • Take some well-earned profits on long-duration ‘pain trade’
    • Reducing interest rate-sensitivity following the recent sharp rally in long bonds, with an expectation of consolidation over the short-term

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Summary of what’s happening in economics/markets:

Our call to “buy the dip” in mid-October amid the heat of a tumultuous three-month pullback has aged well. But after the Fed’s surprise dovish pivot and corresponding Bullcember to Remember almost-everything-rally, some consolidation in price action won’t surprise us as investors reassess valuations and the state of the economy.

This could lead to some market chop, so we’re bringing in some of our active tilts and repositioning to take advantage of possible greater dispersion and potentially more frequent rotations in market leadership. Fundamentally, we remain confident in the strength of the U.S. consumer and the durability of softening inflation. This should provide the Fed with the backdrop to nail a soft-landing in 2024. Rate cuts and an early unwind of QT, along with potential election-year stimulus, could further reawaken animal spirits. Thus, while we may have a couple reservations in the short-term, we still want to err on the side of an overall risk-on stance.

Given the underappreciated but persistent strength of the U.S. economy, we could see investor enthusiasm for domestic value factor stocks reemerge. Recent improvements in these companies’ profitability and margins have them showing the best fundamental momentum now. In general, our belief is looser liquidity and higher earnings lead to higher prices for value stocks.

We’re also incorporating an actively managed factor rotation strategy to harness the daily trading, transparency, and tax efficiency of the ETF structure, in conjunction with the benefits of single security selection. Following a year of high concentration and narrow stock return breadth, we believe factor makeup and timing within equities may be a key ingredient to driving outperformance in 2024.

However, the economy isn't immune to challenges. Any reversal in inflation trends or deepening of geopolitical conflicts remain risks to our cautiously bullish thesis. The labor market remains tight, but some softening has become visible, with continuing jobless claims reaching two-year highs. This may incentivize the Fed to follow-through with rate cuts but could also arguably be an early indicator of further weakness ahead. We believe the bond side of the portfolio remains a ballast for protecting against this sort of potential volatility, with the treasury barbell in place and a freshly embedded active fixed income strategy aimed at generating attractive yields and capable of swiftly adjusting to changing market conditions.

For more information:  Read our 2024 Investment Outlook

This blog post is provided for illustrative and educational purposes only. This information does not constitute research, personalized investment advice, or a fiduciary investment recommendation from Wrought Advisors to the public and is intended only for Wrought Advisors’ professional use in consultation with their clients.