First Quarter in Review: Where Do We Go From Here? Jarvis® Update March 31, 2023

The first quarter has flown by. How is the landscape looking for investors? We answer that question and much more in this week's Jarvis Update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. And, uh, as a preview We got the Final Four coming up this weekend and I'm hoping we could be 2 for 2 and we have an all Florida finals on Monday. Let's see what happens.

Can't say I agree with that one, Nolan, but let's move on. Before we get started, we want to ask everyone to like and share the video if you find value in it. We're going to track you down if you don't. We know, we know there are a few of you watching and lurking. Leave a comment. We'd love to interact with you investors and subscribe and hit the bell for notifications. That way you can find out every time we're out with these videos. And we're out on a biweekly cadence these days. So check that out and please do subscribe. Preview for everyone. Markets did show buoyancy this week as investors digest the news of the last few weeks. Two topics as we discuss the first quarter market activity. We'll keep it simple this week. The first topic is the quarter in review and the second topic is the outlook for the rest of 2023. We produce this show for you, the everyday investor, whether you have a 401(k) or an IRA, if you manage your own investments or you work with an advisor, we'd love to be a resource for you. If you'd like a second opinion on how to position yourself in the recovery for 2023, we'd love to talk. Give us a call on the number below. We got something for you as well. If you're an institutional investor, that's our research service, Left Brain Investment Research. We'll put the link on the screen below. We'd love you to subscribe. Subscribers get 8 to 10 full-length stock reports each month, and also The Chosen. That's our favorite stock and favorite bond opportunity each quarter. So check that out. Either way, we'd love to have you sign up for our monthly newsletter. We're out in a couple of weeks with the next installment. Click the link below and we'll have you on our mailing list to receive our content every Saturday morning in your inbox. We'll start with the market recap. The S&P 500 was up 2.6% over the last week. The Nasdaq was up 1.9% and the small-cap Russell 2000 was up 2.8%. That's the first week we've seen the Russell outperform in some time now. The market did continue a 3-week uptrend, so that's good to see. Treasury rates are also stabilizing. We saw the 2-year note fall below 4% last couple of weeks. It's back a little bit above 4, 4 to 4.1. The 10-year US Treasury is also stabilizing right around 3.5%, definitely down from its high of 4.25% late last year. Also, year-to-date numbers, we've got the S&P up around 6%, the Russell, the Russell 2000 is just about flat, and then the tech-heavy NASDAQ's up about 15%. So quite a bit of outperformance, especially for mega-cap tech names. Nolan, what are your takeaways from the week and also the index performance for the first quarter?

Kind of messy, kind of messy. They say that bull markets climb a wall of worry, and my goodness, do we have a mountain of worry. And we still have volatility that's with us, so we have a lot of conflicting signs. You got the VIX that's down quite a bit, you have underperformance with small caps, and then the S&P looks like that's a strong return at 6%. But let's not forget, we came out of the gates in January at that 6%, and we've had a lot of volatility but haven't gone a lot of places since then. I think I've seen the stat. If you take a look at sort of the S&P 500, there's more stocks down this year than up. So a very sort of interesting year. It's not traditionally what you see in a bull market, but it is a bull market and we'll take them as they come.

Okay, Nolan, we'll just jump right into topic one. So topic one is the first quarter in review. Again, we mentioned there's, there's major underperformance in the small-cap arena. That Russell 2000 is up just 1%. It was interesting last year in 2022, Russell seemed to outperform, especially in the last 6 months. But that has certainly reversed over the last quarter. We had a banking mini crisis. We've all seen the headlines. Silicon Valley Bank, Signature Bank, First Republic. It remains with us. There's still a little bit of fears of contagion out there. Interest rates, however, are leaking lower, so that's probably gonna take a little bit of the pressure off those banks. We've also noted in the office, last year's winners have become this year's losers and vice versa. So the stocks that did well last year, the value-oriented sectors of energy, healthcare, insurance, and a few others have certainly struggled. And as the, as we've seen with the 15% move in the NASDAQ, tech is certainly taking the leadership. We also have noticed Europe, And that's through the EAFE index has outperformed the S&P. We'll throw up a chart so you can see that as well. Nolan, what are your thoughts around the past quarter? What are the most important takeaways?

The unpredictability of the market is the takeaway, 'cause coming into this year, coming off of December where tech and growth just had a horrendous fourth quarter to end an 18-month stretch that wasn't productive, it's probably the last thing most people would expect is for the NASDAQ to really be leading the charge. And really when you look at the S&P, it's really the top 10 companies that are leading. If you strip out the top 10 companies, I think the average stock in the S&P is down 1% to 2% on the year to date. So it's really top heavy. So that is somewhat a surprise. And then coming out of last year where people were trying to be defensive, you know, if you'd heard coming into January and December that there was a banking crisis that was going to happen, inflation would still be with us and the markets would still be unsettled. You'd think the consumer staples and utilities and, and some of these safety plays would typically hold up. So the whole reversal thing has been somewhat surprising, uh, for most people. And I think the same thing with, with interest rates being down. So that's typically what happens in the market, which is why we say think long term, ignore the news of the day, buy quality holdings, and then we want to ride them for a while.

Yeah, Nolan, in the short term, the market really goes wherever it creates the most maximum pain. And, uh, you know, we gotta take that as an opportunity, especially if you got cash on the sideline, really a, a great opportunity to get involved in a number of industries and, and also in fixed-rate securities. Again, if you wanna take a look at what you can do in terms of the opportunities that are out there in the market, definitely get in touch with us. With that, we'll move on to our second topic. So topic 2 is the outlook for the rest of 2023 and beyond. So of course, we're long-term investors here at Left Brain. We want to know what's going to go on for the next year, 2023. But what we're really doing in 2023 is planting the seeds for the next 2, 3, 5, and 10 years. What we did note is, of course, growth stocks were the first to start falling in this rolling bear market. So back in 2021, when things started to fall apart, it all began with growth. We saw a number of growth stocks that were down 50, 60, 70, 80, and plus percent. And that's only moved on to other areas of the market. We have seen the mega-cap tech starting to roll back. As Nolan said, the top 10 stocks are really leading the charge, and below there is not really as much good news. We also have seen software do quite well, semiconductors, cybersecurity, and we also have new themes emerging like AI and ChatGPT. That are really driving investment themes, including companies like Nvidia and Microsoft, really big beneficiaries of that. Nolan, where are you seeing opportunities in 2023 and beyond, and how, how should investors be positioning in kind of a volatile space right now?

So where am I seeing opportunities? It's everywhere. The markets are littered with opportunities, both in the stock side and in the bond side. Let's start with bonds. We've made note before It's been 10, 15 years since we can earn anything interesting on interest-bearing securities. But, but not anymore. We're finding high-quality bonds, 6, 7, 8. We looked at a couple this afternoon that were 9. So these are very, very attractive. A lot of bonds trade below par. So if they go back to a par price in the next 12 months or so, you get not only significant income but significant capital gains. So before rates change and things settle down and the crisis of the day goes from the front page to the back page, we think it's an interesting time to lock in streams of income, particularly on people that have money on the sidelines in cash. The other thing that I would say that there's opportunities— we like opportunities all over the place in stocks coming in this year, into this year. We just wrote Nolan's Note and put that out. So for those of you who haven't looked at your inbox, last week we sent out a note with the newest edition of Nolan's Notes. It's the annual letter that we write to all of our investors. And one of the things that we take a look at is opportunities. And coming into this year, we really like the small-cap space. The valuations there are not very demanding, not a lot of business outside the US. And so a really fertile, fertile ground for strong earnings growth. And small caps have underperformed a little bit this year. So if we thought the opportunity was good coming into this year, it's much better now. The other thing that you mentioned is growth stocks. You know, we made a lot of money in growth stocks the last 2 years. They had been out of favor. They're starting to move up now. I think the news that you mentioned on AI and ChatGPT is really good from a lot of perspectives. One is it just shows that investors are still looking for opportunities to make money. And when you see some new technology that's poised to send profits to investors and investors are buying shares, that's a really bullish thing. And I think it's bullish for the, for the whole market. We like growth shares. You mentioned some of the names that in tech that we like. We are bullish again on tech and growth. And there's a lot of areas that look attractive because prices are cheaper, expectations have been lowered. And so it'll be much easier to have beaten raise on earnings releases coming on throughout the year. The backdrop looks profitable for, for 2023.

I think it's really interesting, the AI innovations that we're seeing kind of really take shape. In the last few months. And, you know, a lot of the companies that are involved with AI, their stocks were slaughtered in the last 2 years. But it's interesting because time marches on and innovation continues on. That's what we're really interested in, what goes on in the underlying business behind these stocks. Stocks can fall, the prices can fall, but at the same time, these companies continue to innovate and the best companies are going to rise to the top. Pretty much every situation. So it's definitely something to keep in mind as we look at what we're going to do for the next few years. Now let's zoom out and speak to how long-term investors should be behaving in this space. Obviously we think there's a lot of opportunity, but how should they respond to short-term fluctuations? It's, it's very difficult from an emotional standpoint. Okay. I think there's a lot of opportunity. I go and buy a stock and geez, it falls 10% in a month. What should I do? How, how should I respond to that?

Well, so I think the game plan's gonna be different based off of if you have an advisor, if you don't. And then the example you gave, it sounded like an investor who was kind of a do-it-yourselfer. And we've kind of, we've been out speaking to investors and we've met a number of these people who, for whatever reason, is they're their own investment advisor, their own portfolio manager. And so they have to daily make a buy or sell decision. I don't envy them. There's a lot happening in the world. It takes us a lot of time, a lot of resources, a big team, a lot of data, a lot of technology. And all of our waking hours to keep up, to even come up with a coherent investment thesis. And so if you're doing it part-time while you're watching the kids, while you have a personal life and taking care of your spouse in the house and everything else you have, it's very difficult. If you have an advisor, I don't imagine there's much panic out there. At least I know among our investors there's not much panic. I mean, there's some concern, but not panic. I think that's the way it should be. There are opportunities. The one thing that you mentioned earlier, the world isn't back to normal yet. We have a litany of issues. All the investors that are watching knows what they are. The one I want to talk about is the crisis du jour, which is the banking crisis. And people are thinking about cash and $250,000 FDIC insurance. That has created opportunity. And I know a lot of analysts are flocking to banking stocks saying that they're way too cheap. We're going the other direction and we're looking for the opportunity in the bonds. Bonds have to get paid before stocks. So you could have a situation— we think most of these banks are going to survive or merge and do just fine. Doesn't mean the stocks are going to go up a lot. Means that it's going to be viable entities that are going to earn revenues and pay those out in dividends and profits. But if you're a bondholder, all you care about is the company current that continues to exist. And a lot of these bonds that are investment grade, very high quality bonds with assets backing them— 2 months ago, before Silicon Valley Bank went under, they were yielding 4 to 5%. And now, as you know, Brian, we've been looking in the office, some of these bonds yield 7 to 9. And so we think if in 9 months or so by Christmas this crisis is over, those bonds will probably be back to yielding what they were before, which means whoever bought them is going to have attractive appreciation.

And that just brings up a great, more general point, Nolan, which is, you know, we're fundamental investors. We're looking for situations where stocks or bonds temporarily fall on hard times. The price drops. Nothing really changes in the fundamentals of the story. And then we have the opportunity to step in, buy things at a lower price, and then eventually profit in a few years when things come back to normal. So great, great opportunity in some of these banking, banking sector opportunities, both in stocks and bonds. We'll be looking, looking through those for the next few months. Nolan, we're going to close it out here. Any final thoughts for the viewers?

Go Florida. We're hoping for an all-Florida championship, FAU and Miami. But for everybody else, I know it's spring break season, so get out there, travel, turn off the news, have a good time. And with all the excess cash that you bring back from your travels, give us a call and let's talk income securities.

Thank you, Nolan. Thanks to the viewers, and we'll see you again next time.