Dear Friends,
As we move into 2024, and we look at our forecast for the year, we think it is important to first look back to 2023. We went into last year thinking that a recession was likely and that the stock market would have an unproductive year, but neither of those things happened. Our economy has stayed strong and the S&P 500 returned just over 24% last year. This surprised everyone, further proving how unpredictable the economy is. It is important for us to watch how market perception shifts, as our economy evolves, so we can adjust our investment strategy. While the stock market surprised us, our growth and hare model did excel this past year, gaining 19.84 and 23.84% respectively. The fixed income markets were very interesting in 2023, due to the Federal Reserve raising rates throughout the first half of year and that made shorter-term bonds and CDs attractive. Rates remain elevated, as we have continued to fight inflation, with current inflation sitting about 1% higher than our 2% target.
To start 2024, the general consensus is that there will likely be a short and mild recession sometime later this year. This recession may temporarily reduce the value of the stock market and increase unemployment, but we do not think it will cause any long-term systematic issues for our economy. We also think the Federal Reserve is done raising interest rates and we are expecting that they will begin to cut rates at some point this year, potentially starting as early as the second quarter.
Last year we thought that a value strategy provided us the greatest chance at overperformance. Unfortunately, large technology stocks mostly dominated the markets and market returns were propped up by a very narrow group of growth stocks. Going into 2024, we believe that a more value-oriented strategy will pay-off, as we expect the market to broaden and reward companies that are undervalued. For fixed income, we are spreading our investments out over 1-to-10-year maturities to take advantage of high short-term rates and lock in higher rates for the future. This blended strategy should provide us with safe returns for the future. We are excited about this year, and although there may be bumps in the road, we are hopeful that our economy and stock market will be prosperous in 2024.
Below are our best current recommendations:
As we move into 2024, and we look at our forecast for the year, we think it is important to first look back to 2023. We went into last year thinking that a recession was likely and that the stock market would have an unproductive year, but neither of those things happened. Our economy has stayed strong and the S&P 500 returned just over 24% last year. This surprised everyone, further proving how unpredictable the economy is. It is important for us to watch how market perception shifts, as our economy evolves, so we can adjust our investment strategy. While the stock market surprised us, our growth and hare model did excel this past year, gaining 19.84 and 23.84% respectively. The fixed income markets were very interesting in 2023, due to the Federal Reserve raising rates throughout the first half of year and that made shorter-term bonds and CDs attractive. Rates remain elevated, as we have continued to fight inflation, with current inflation sitting about 1% higher than our 2% target.
To start 2024, the general consensus is that there will likely be a short and mild recession sometime later this year. This recession may temporarily reduce the value of the stock market and increase unemployment, but we do not think it will cause any long-term systematic issues for our economy. We also think the Federal Reserve is done raising interest rates and we are expecting that they will begin to cut rates at some point this year, potentially starting as early as the second quarter.
Last year we thought that a value strategy provided us the greatest chance at overperformance. Unfortunately, large technology stocks mostly dominated the markets and market returns were propped up by a very narrow group of growth stocks. Going into 2024, we believe that a more value-oriented strategy will pay-off, as we expect the market to broaden and reward companies that are undervalued. For fixed income, we are spreading our investments out over 1-to-10-year maturities to take advantage of high short-term rates and lock in higher rates for the future. This blended strategy should provide us with safe returns for the future. We are excited about this year, and although there may be bumps in the road, we are hopeful that our economy and stock market will be prosperous in 2024.
Below are our best current recommendations:
HARE Portfolio
(Growth Companies)
Alphabet Inc Class A (GOOG)
Alphabet is a holding company for internet media giant Google. Google generates 99% of Alphabet’s revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home, also contribute to other revenue. GOOG has a wide moat rating, as their search engine and video streamer are both the dominant players in the industry. A wide moat rating signifies that a company has a 20-year competitive advantage over most of their competitors. Revenue is expected to grow 11% year-over-year for the next five years.
Key Financial Information
Stock Price
$138.65
Fair Value Calculation
$161.00
Potential Gain
16.12%
Morningstar Rating
4 Stars
CFRA Rating
Buy
Argus Comp Rating
Buy
Schwab Equity Rating
B
TORTOISE Portfolio
(Dividend Paying Companies with a Stable Business Model)
Medtronic PLC (MDT)
As one of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its portfolio includes pacemakers, defibrillators, heart valves, stents, insulin pumps, spinal fixation devices, neurovascular products, advanced energy, and surgical tools. The company markets its products to healthcare institutions and physicians in the United States and overseas. They are the largest pureplay medical device manufacturer. Their scale provides them with the market dominance needed to acquire a Morningstar wide moat. MDT is competitive in every field they develop products in and this a trend we believe will continue for the long-term. MDT is expected to reach 4% top-line growth a year until 2028, while also gradually expanding margins.
Key Financial Information
Stock Price
$83.93
Fair Value Calculation
$112.00
Potential Gain
33.44%
Forward Dividend
3.29%
Morningstar Rating
4 Stars
CFRA Rating
Buy
Argus Comp Rating
Buy
Schwab Equity Rating
A
Growth ETF Pick of the Month
Invesco Aerospace & Defense ETF (PPA)
The Invesco Aerospace and Defense ETF holds 52 companies in this segment. Most of PPA’s holdings are reliant on long-term government and commercial contracts, ensuring that their revenue is protected. The US is the world’s largest spender on defense and there is always a need to protect our country, so we feel that defense spending will only increase as time goes on. PPA’s holdings are generally companies that are profitable and have strong business fundamentals. Nearly 42% of holdings have wide moats and 21% have narrow moats, ensuring these companies have long-term competitive advantages.
Top 10 Holdings
Holdings
Portfolio Weighting
Morningstar Rating
RTX Corp
6.68%
4 Stars
Lockheed Martin Corp
6.61%
3 Stars
Northrop Grumman Corp
6.22%
3 Stars
Boeing Co
6.01%
3 Stars
General Electric Co
6.00%
3 Stars
General Dynamics Corp
4.87%
3 Stars
Honeywell International Inc
4.53%
4 Stars
L3Harris Technologies Inc
4.50%
4 Stars
TransDigm Group Inc
3.68%
3 Stars
Parker Hannifin Corp
3.45%
3 Stars
Key Financial Information
Current Price
$90.20
1 Year Performance
18.41%
3 Year Performance
12.05%
5 Year Performance
13.62%
Morningstar Rating
5 Stars
Expense Ratio
0.58%
Fixed Income ETF Pick of the Month
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)
The Vanguard Intermediate Corporate Bond Fund is an ETF that focuses on investing in corporate issued bonds that have an average maturity of 5 to 12 years. The effective duration of VCIT is 6.11 years. All of VCIT’s holdings are investment grade, with the majority of holdings rated either A or BBB. VCIT holds over 2,000 individual bonds, which limits our default risk. Extending our duration right now is a good strategy because we believe the Federal Reserve is done raising interest rates, and as the Fed eventually moves to cut rates, longer duration securities will be worth more. VCIT is also a very inexpensive fund, with an expense ratio of only 0.04%.
Top 10 Holdings
Holdings
Portfolio Weighting
T-Mobile USA, Inc
0.37%
JPMorgan Chase & Co
0.32%
The Boeing Company
0.30%
Amgen Inc
0.30%
Bank of America Corp
0.30%
Anheuser-Busch InBev Worldwide Inc
0.29%
Bank of America Corp
0.29%
AbbVie Inc
0.28%
Pfizer Investment Enterprises Ltd
0.28%
WarnerMedia Holdings
0.25%
Key Financial Information
Current Price
$80.58
1 Year Performance
8.98%
3 Year Performance
5 Year Performance
Morningstar Rating
5 Stars
Expense Ratio
0.04%
Yield
5.11%
Bond Picks of the Month
CDs
Author's Perspective
Yours Truly,
Alan Locke, President
Locke Investment Management
Alan Locke, President
Locke Investment Management
About Alan Locke
Alan Locke, BS, MBA, CGA, CFP is the President of Locke Investment Management. After a successful financial management career, Mr. Locke founded Locke Investment Management, a registered investment advisory firm, in 1994. His credo has always been to build the best possible portfolio for each client in order to help that client achieve his or her financial goals.