Elyxium Insights

Calvin Jung 12/11/24 Calvin Jung 12/11/24

The Anatomy of the Bull Market that Began in 2022

Introduction

The bull market that began on October 12, 2022, was marked by a recovery despite the economic challenges brought on by the COVID-19 pandemic and geopolitical instability. The market's resurgence was not only driven by an overall economic recovery, but also by substantial shifts in technological change, central bank actions, and sectoral leadership. Let’s explore the key drivers that contributed to its growth, the challenges it still faces, and the broader economic and geopolitical context that shaped its trajectory.

Background: Post-Pandemic Recovery and Geopolitical Challenges

The prior bull market to the current one that we are in unfolded in the aftermath of the dramatic market downturn in early 2020. The pandemic threw global markets into disarray, with widespread economic disruptions and lockdowns, resulting in a sharp market sell-off. However, as vaccines were rolled out globally and economies began to reopen in late 2020 and into 2021, the market started to recover. By the end of 2021, stocks had regained much of their lost ground, driven by optimism surrounding the reopening of economies, government stimulus packages, and pent-up consumer demand. It was a lesson in market dynamics and the power of coordinated efforts.

2022 brought a shift in the narrative. Several factors would lead to a severe 25% S&P 500 bear market (correction) that transpired from January 2022-October 2022. These included the ongoing effects of COVID-19, which continued to disrupt supply chains, enhancing the backdrop of persistent inflation which peaked in June of 2022 on a year over year basis. The economy toiled with two quarters of negative real GDP growth in Q1 and Q2. New geopolitical risks arose as evidenced by the Russian invasion of Ukraine in February of 2022. The Federal Reserve also began the most aggressive interest rate hiking cycle in 40+ years to stave off inflation. While the year was marked by challenges, it also laid the groundwork for the current bull market, a testament to the cyclical nature of market forces.

I have mentioned the bull and bear markets that have come just before this current bull market for a reason. When studying bull markets, an integral dynamic that investors should evaluate is to look at the bear market that preceded it for clues into how the following bull market will look, not only in terms of duration and strength but also in volatility. Bear markets have a very synchronous relationship to the longevity of the bull market. The key variable appears to be whether or not the preceding bear market was associated with a recession. If it was, precedent suggests that the subsequent bull market delivers higher returns and less volatility. Markets preceded by a non-recessionary bear market tend to be weaker and more volatile.

The chart below illustrates this well.

Bull markets not associated with a prior recession trail bull markets that were associated with one by about 22% after two years and 25% after three years. The non-recessionary bull markets also face slightly greater maximum drawdowns in their first three years. One attributing factor for this may be that a “no recession” bull market doesn’t have a significant change in its underlying valuation. The average starting P/E multiple (a measure of a markets valuation of its price divided by its earnings) of a bull market not associated with a prior recession is 16.5x versus 14.0x for a bull market which was preceded by a bear market associated with the recession. Over long-term periods, starting point valuations matter.

This insight ties very closely with my study of market cycles dating back to 1977. Studying bear markets is critical to understanding how the future may play out. As a matter of fact, my work has shown that bear markets define the bull market that follows them. Bull markets actually play by different rules depending on the conditions leading up to their birth. In the context of our market today, with this current bull market having been preceded by a bear market not associated with a recession, investors should likely expect lower returns and a larger maximum drawdown through the first 3 years of this bull market’s life. Market returns in years 1 and 2 have been higher than what history would dictate on average. Using this as our guide, we would expect year 3 to potentially be lower from a return perspective.

Style and Capitalization

Calling this market narrow might be an overstatement. This bull market has been driven by large capitalization US stocks. In fact, it has been the weakest start for small caps in any bull market in modern history. This does not surprise us, as you’ve likely heard us talk about the small cap index being one that contains many struggling companies, with many being unprofitable. Some companies have been in this universe for long periods of time and have not been successful (or they would have moved to another larger cap index). Others have fallen into the index because they have performed poorly. One of the more modern dynamics of capital markets pertains to the length of time that companies are staying private. IPOs (Initial Public Offerings) that come to market are now usually larger than the small cap universe allows by market capitalization. This adds up to an index that may be hindered in the future given this dynamic fueled by the large amounts of capital in the private equity and venture capital markets. These dynamics result in our recommendation for an underweight to the small cap category and that if money is to be allocated to small cap that it be actively managed. Markets also tend to narrow as they age. If small caps didn’t perform at the beginning of this bull, I would not expect them to start anytime.

Are Markets Getting “Smarter”?

Lest we forget that the Fed held the federal funds rate at around zero as recently as the first quarter of 2022. Adding to that, the Fed was also still buying billions of dollars of bonds every month to stimulate the economy. All this despite 40-year highs in various measures of U.S. inflation measured at that time.

But then the Fed moved forcefully. Over the next 16 months, the central bank raised the fed funds rate by more than five percentage points. Risk assets and the bond market sold off aggressively creating the bear market that we speak about in this piece. All that changed on October, 2022, as the momentum shifted. It appeared at that time that the market began to realize that the Fed may be able to pull off the historically difficult “soft landing,” and rallied in anticipation of that belief. In another first, this market rally has been larger than any other in history between the Fed’s last hike and their first cut the market bottomed even though the Fed would go on to raise interest rates six more times (75bps, 50bps, and then four 25 bps hikes) before they would eventually pause for over a year.

Markets seem to be learning from history and made an attempt to anticipate Fed cuts even though they were far off in the future. “Don’t fight the Fed” didn’t work in this instance. This is just another example of the market’s ability to arbitrage away future good Fed news. Investors - take note.

Conclusions, Lessons and Portfolio Positioning

It will pay to be active in less efficient areas of the market, including US small cap, International small cap, and Emerging markets.

Simply stated - expect more volatile returns going forward. As a reminder, this bull market was not preceded by a recession. The strong returns so far in this run could be interpreted to mean that markets may be a bit ahead of themselves. Investor optimism, a contrarian indicator, also continues to be at high levels. This has historically been a sign of at least a pause in a bull market’s trajectory.

Inflation will be the key. Bond yields have continued to move generally higher since the election. Higher inflation does eventually impact the P/E (valuation) multiple, as investors are willing to pay less for stocks as inflation rises. Expect 2025 to be a year in which earnings growth must be the primary driver for stocks.

Markets appear to be evolving, showing an increasing ability to anticipate policy changes. It was almost as though investors had developed a knack for deciphering the Fed’s next moves, reacting with a level of confidence that seemed both calculated and optimistic.

Additional thematics such as AI could still be in early innings. One clear fact that we cannot overlook is that we are at a technological pivot point in human history. AI has the potential to change all businesses. Productivity is the key to standards of living, as it allows for greater efficiency of companies. This dynamic could be incredibly shareholder friendly, resulting in improved margins and efficiency. If firms are able to do everything from manufacturing to services more effectively and with less cost, all will benefit. This is another reason to emphasize that we have exposure to the major large cap businesses, in order to seize upon this along with private exposure in the venture capital and private equity frameworks. Active management may also add some value in the large cap space, in order to truly to identify the advantages of the technological shift.

The optimism of technological innovation provokes the ultimate question: how much of the good news has already been priced into this bull market? We believe that an appropriate posture is to be neutral to your overall portfolio target allocation. Given our previous commentary and outlook, look for us to eventually add exposure to risk assets on market weakness.

I hope you enjoyed this written journey that dissected the bull market we have had over the past two years. I always try to incorporate history into my decision making because I believe it is something that forces all of us to understand how markets traditionally perform after bear markets which historically has given investors some hints as to what they may do in the future.

Elyxium Wealth LLC (“the FIRM ”) is a registered investment adviser located in Beverly Hills, California. The FIRM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.

This presentation is limited to the dissemination of general information regarding the FIRM’s investment advisory services. Accordingly, the information in this presentation should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from the FIRM. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Any client examples were hypothetical and used to demonstrate a concept.

Past performance is not indicative of future performance. Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the FIRM), or product referenced directly or indirectly in this presentation, will be profitable. Different types of investments involve varying degrees of risk, & there can be no assurance that any specific investment or investment strategy will suitable for a client’s or prospective client’s investment portfolio.

Calvin Jung 11/18/24 Calvin Jung 11/18/24

U.S. Federal Deficits: A Familiar Problem with Potentially Far-Reaching Consequences

Introduction

U.S. federal deficits, which occur when government expenditures exceed tax revenues, have been a persistent feature of the national landscape. Debt and deficits have risen dramatically in recent decades, particularly during the 2008 financial crisis and again during and after the COVID-19 pandemic in the years 2020-2023. In 2024, the U.S. budget deficit stands at a substantial $1.8 trillion, driven largely by increases in Social Security, Medicare, Defense spending, and—let’s not forget—interest payments on our national debt, which now exceeds a staggering $35 trillion. This situation has naturally sparked concerns about the long-term sustainability of such debt levels.

As deficits grow, the government is left with little choice but to issue more debt in the form of Treasury bonds. This year, about one-third of our total debt needs to be rolled over, requiring us to return to the bond market and pay whatever interest rates are offered. This continuous cycle of borrowing and issuing debt can have widespread impact on markets. Let’s explore these consequences in more detail.

A chart showing the national debt under each president starting from October of 1977 until October of 2024 can be found below.

*Data provided by The U.S. Department of Treasury*

The Impact on Interest Rates and Inflation

One of the most direct ways that deficits affect the equity markets is by driving up interest rates. When the U.S. borrows more frequently, it must offer higher interest rates to attract lenders. Higher rates, in turn, can dampen stock values, as they increase the discount rate applied to future earnings, thereby lowering their present value. Companies also face higher borrowing costs, which can curtail expansion plans and reduce consumer spending. And let’s not forget the bond market—higher bond yields can make stocks seem a little less attractive by comparison.

Deficits can also stir inflation concerns. When the government borrows heavily, especially during periods of low unemployment and strong economic growth, demand can outstrip supply, pushing up prices. And as inflation rises, so do interest rates, as lenders demand compensation for the expected higher prices in the future. It’s a bit of a vicious cycle—deficits, inflation, interest rates—all feeding on each other.

The Fed: Stepping In, As Usual

As we have witnessed since 2022, when inflationary pressures are mounting due to contributors such as deficit spending, the Federal Reserve has and may have to continue to step in and raise short-term interest rates to cool down the economy since the Fed has a mandate for price stability. However, such actions can lead to market volatility, as investors reassess what they’re willing to pay for risk assets such as stocks in a higher-rate environment. In other words, things can get a bit volatile when the Fed plays the role of an economic counterbalance to fiscal policy with monetary policy.

Crowding Out: Less Room for Private Investment

As the government borrows more, there’s a risk of crowding out private investment. Essentially, all of the government borrowing can divert capital away from the private sector, making it more expensive for companies to access capital through public markets. This often results in higher interest rates for businesses looking to borrow—for new projects, innovation, or expansion—none of which is geared for long-term growth. This impact is particularly pronounced in industries that rely on heavy capital investment, like manufacturing and technology.

Investor Sentiment: Uncertainty Looms

Investor sentiment is sensitive to the government’s fiscal health. Persistent deficits can cast doubt on the government’s ability to manage its debt load, eroding confidence in the broader economy. If investors start questioning the government’s sustainability, they might shift to safer assets or even assets outside of the domestic United States, reducing exposure to equities in favor of bonds or other lower-risk investments. This creates a demand profile change for risk assets and a flight to other frameworks to invest capital.

Reduced Spending in Other Key Areas

While deficit spending can provide a short-term boost, the long-term consequences are less glamorous. As deficits grow, the U.S. faces higher interest expenses, which leaves less room for productive government spending in areas like infrastructure, education, and research. Over time, this lack of investment could stifle economic growth and significantly reduce corporate profitability, which may lead to more subdued stock market returns.

A Weakened U.S. Dollar

Large deficits can also weaken the U.S. dollar. If global investors lose confidence in the government’s ability to manage its debt, they may decide to invest elsewhere. This would weaken the dollar, making imports more expensive and adding another layer of inflationary pressure. On the bright side, a weaker dollar can help U.S. companies sell more overseas, giving a bit of a boost to certain sectors of the stock market. But the overall picture of the impact of deficits on the dollar remains a tricky balancing act.

Can Deficits Ever Be a Good Thing?

Despite all the doom and gloom, deficit spending isn’t entirely without merit, especially in the short term. Borrowing can stimulate economic activity, boost consumer spending, and drive corporate profits. In fact, we’ve seen significant deficits for decades, yet the stock market has continued to perform well. The recent 2020-2021 period is a perfect example—government spending played a critical role in reviving the economy after the COVID-19 shutdown.

What Can We Do About the Debt?

So, is there a way out of this financial puzzle? Generally, there are three options: grow your way out of debt, inflate your way out, or—least likely—default.

Growing the economy is the best option, as it increases tax revenue, and if spending is kept in check, the debt can be managed. Inflating your way out involves printing more money, which can devalue the currency but makes debt repayment easier in "cheaper" dollars. Historically, a mix of growth and inflation has helped manage our debt.

Conclusions and Recommendations

US deficits are complex in their impacts on interest rates, inflation and the stock market. Although the effects of deficits can be positive in the short run, in the long run, the ramifications of high debt levels can have negative impacts on interest rates, inflation, and (reduced) investor confidence. Deficits may also make the job of the Fed more difficult as they add yet another variable to its decision-making process.

As our total debt now exceeds the annual output of this country, and interest rates and servicing cost on the debt are no longer near 0%, there is once again renewed focus on this issue. As investors, it is not only imperative to monitor the situation closely, but also, we must neither overreact nor underreact to its importance.

The time may come when the size of our nation’s debt will matter to bond markets, and thus may influence all risk assets as well. In fact, in 1983, strategist Ed Yardeni coined the phrase “bond vigilante” in an attempt to talk about a market’s breaking point for not lending any more money until discipline is re-instituted back into the system. These bond investors, in essence, withhold money from the market (pushing up interest rates), forcing the lender to change their ways. So, it’s all about a breaking point. After all, if one was worried about deficits impacting investment decision and outcomes, one would have been losing sleep since the 1980’s, and missed out on decades of strong equity market returns in the process.

We continue to recommend that clients not change their asset allocation due to current deficit levels. With interest rates falling and a diversified economy that continues to remain resilient, we believe, at least for now, these two issues will dominate investor’s attention and provide enough horsepower to make our debt levels manageable. For now, the over 50 all-time highs that the S&P 500 has made this year have shown that markets are not yet thinking the deficit is at “crisis” levels. Of course, we will remain diligent as we assess this ever-changing situation, and communicate with you, if we see any reasons for greater concern.

Joel Kofman 11/11/24 Joel Kofman 11/11/24

Assessing the Potential Impact of a Trump Presidency on the Markets

Introduction

Understanding the potential implications of another Trump administration involves examining likely policy continuities and adjustments, particularly as they pertain to economic sectors, industries, and potentially individual equities. This analysis and commentary serve as a general blueprint, built on themes from previous Trump administration's policy approach and stated objectives. While this analysis is insightful, it's worth noting that the U.S. stock market has historically demonstrated resilience regardless of presidential administration. Over time, factors such as Federal Reserve policy, inflation rates, consumer strength, and corporate earnings have often proved more influential. According to research from Fidelity Investments, market performance has remained positive on average regardless of whether a Republican or Democrat occupies the White House.

This suggests that market success often hinges on external economic factors—such as monetary policy and global economic stability—over which the president has limited control. The Federal Reserve’s current stance, inflationary trends, and resilient consumer spending could play a critical role in shaping economic outcomes under a Trump administration.

1. Economic Growth and Fiscal Policy

Pro-Business, Pro-Growth Stance: Trump’s previous administration championed policies aimed at stimulating economic expansion through corporate tax cuts, deregulation, and prioritization of domestic manufacturing. The 2017 Tax Cuts and Jobs Act, which lowered corporate taxes to 21%, had a significant impact and allowed for a repatriation of over $1 trillion driving both investor and corporate optimism. While the Trump administration has publicly commented on another effort to lower the corporate tax rate, the repatriation effect that occurred in the previous administration is unlikely to be repeated.

Potential Beneficiaries:

Large Corporations: Lowered taxes and deregulation could again favor large corporations, though a stronger U.S. dollar —likely with a renewed pro-growth agenda— might curb some international gains.

Financial Sector: Trump’s previous regulatory loosening on banking regulations such as Dodd-Frank allowed banks and financial firms to expand profitably. A second Trump administration could see renewed interest in M&A within the regional banking sector.

Energy Sector: The previous administration promoted fossil fuel production, benefiting oil, gas, and coal industries. However, Trump’s trade policies, particularly concerning China, may weigh on oil exports, complicating this picture.

Technology: Trump’s administration took a relaxed stance on antitrust and privacy, which some believe could support a continuation of tech giants’ growth. This approach could again lower regulatory barriers, allowing for potentially higher valuations in the tech sector.

Potentially Affected Sectors:

Healthcare: Attempts to dismantle the Affordable Care Act created uncertainty for healthcare insurers and health systems, with disruptions potentially continuing in a future Trump administration. Industry insiders caution that ongoing volatility could lead to higher premiums and insurance market instability.
Environmental and Renewable Energy: Renewable energy industries may face headwinds, as policies could favor traditional energy sectors over clean energy investments. According to the International Renewable Energy Agency, regulatory instability poses challenges to long-term investments in green energy.

2. Regulation and Tax Policy

Deregulation Focus: Trump’s administration frequently targeted regulatory reforms, particularly within environmental, financial, and labor-related domains. His “two-out, one-in” rule for new regulations exemplified this deregulatory approach, which could resurface in another term

Potential Beneficiaries

Industries Dependent on Deregulation: Energy (fossil fuels), financial services, manufacturing, and defense sectors.
Corporations: Lower corporate taxes led to higher profits for many large corporations, potentially boosting stock prices.

Potentially Affected

Environmental Groups and Clean Energy: Deregulation in environmental policies could hinder green energy initiatives.
Labor Unions: Trump’s stance against unionization and labor protection laws could impact the profitability of sectors with heavy union influence.

3. Trade and Foreign Policy

America First Doctrine: Trump’s “America First” stance could impact trade and foreign policy, with a renewed focus on protectionism and reshoring. His administration previously withdrew from international agreements like the Trans-Pacific Partnership and the Paris Climate Accord. A new Trump presidency may escalate tariff conflicts, potentially altering global supply chains.

Potential Beneficiaries:

Domestic Manufacturing: Higher tariffs and "reshoring" efforts would benefit U.S. manufacturers and companies that rely on domestic production.

Defense Sector: Increased defense spending could boost defense contractors. This is a continuation of policy emphasis of both the first Trump administration and current Biden administration.

Potentially Affected:

Global Supply Chains: Many industries reliant on cheap imports or global supply chains would face higher costs. Higher tariffs on imports, particularly from China, could foster demand for U.S.-made goods. However, industry experts caution that reshoring initiatives may struggle to achieve scale given the high costs (source: National Association of Manufacturers).

Tech, Electronics, Manufacturing: Tariffs on International and/or Chinese goods may negatively impact many technology firms that relied on manufacturing in China and abroad.

4. Social Issues and Public Policy

Immigration, Law, and Order: Trump’s administration previously emphasized stringent immigration policies and criminal justice reforms focused on enforcement. These issues could again shape his policy agenda, with implications for industries tied to immigration.

Potential Beneficiaries:

Private Prison and Immigration-Related Services: Companies that work with immigration detention or private prisons could see favorable conditions.

Defense and Law Enforcement: Trump’s support for law enforcement agencies and military spending could benefit related industries. Increased funding for law enforcement and military could benefit related industries and companies.

Potentially Affected:

Social Programs: Companies focused on diversity, equity, and inclusion may encounter challenges if Trump’s administration de-emphasizes these initiatives. Government contracts could become less accessible for organizations that prioritize these values, impacting profitability in sectors like consulting and social services.

Conclusion and Parting Thoughts:

Under a Trump administration, the market might favor traditional energy sectors, large corporations, and financial institutions that benefit from deregulation, tax cuts and an improved M&A environment. The day after the election, many investors began positioning for the regime ahead with these sectors and segments of the market exhibiting outperformance and high volumes of activity.

As with all administrations, it is prudent to be observant and aware of the potential impacts, positive and negative of policy frameworks and the impact to markets. The Trump administration emphasis on domestic growth amid a low-unemployment environment may introduce inflationary pressures, complicating the Federal Reserve’s efforts to fulfill its dual mandate (healthy inflation and strong employment). An “America First” policy may lead to increased costs for consumers, possibly delaying anticipated interest rate cuts whilst boosting manufacturing and domestic production of goods and services. If inflation accelerates, bond prices and equity valuations may suffer as the Federal Reserve could have a more difficult environment to manage.

Ultimately, while Trump’s policy direction offers investment opportunities, it’s essential to remain focused on evolving conditions and external economic forces that influence market dynamics. As with all candidates and administrations, what promises were made on the campaign trail and what policies and dynamics of those policies are implemented remain the focus and emphasis for navigating the next phase administration. We will always be working to position our portfolios to take full advantage of market opportunities and protection in times of volatility.

Calvin Jung 10/29/24 Calvin Jung 10/29/24

The Impact of Presidential Elections on U.S. Stock Markets

Introduction

Presidential elections in the United States are significant events not only in the political arena but also in the financial markets. Every four years, the uncertainty surrounding the election outcome seems to put investors on edge. Fortunately, markets have had ample experience navigating these periods and tend to behave more rationally than many might expect. Let’s delve deeper into presidential election years and explore what history teaches us about positioning our investment portfolios around election dates.

Election Year Volatility in the Stock Market

U.S. stock markets have traditionally been volatile during election years. This volatility is largely driven by investor sentiment. Many believe that the uncertainty surrounding an election might prompt investors to move away from riskier assets. As these investors become cautious, markets tend to move sideways or even decline. However, this caution leaves room for a post-election rally, which markets often experience, especially if the incumbent is re-elected. The reasoning for this seems to have been that markets are familiar, and thus comfortable with the current administration.

Does the President's Political Party Influence Market Performance?

With this in mind, it begs the question: how much does the political party of the president actually impact market performance over time? Traditionally, Republicans are perceived as more business-friendly, favoring lower taxes, less regulation, and policies that support corporate profitability. Democrats are generally associated with policies aimed at reducing income inequality, expanding social programs, and increasing regulation, particularly in sectors like healthcare, finance, and energy.

Given these implications, one might blindly expect that markets would do significantly better under Republican leadership versus Democratic leadership. However, by taking a closer look at historical stock market data under different presidential parties and candidates, it is clear markets can do well and have done well under both Democratic and Republican presidents. The chart below shows this exact relationship. Due to the complexity and widespread interest around Presidential parties and the stock market, there continues to be extensive research around this topic, with some studies even indicating markets have tended to perform better under Democratic leadership than Republican leadership.

The Role of Economic Inheritance

Perhaps the presidential party receives too much credit—or blame—for the market's performance during its tenure. In my opinion, it is not the president's policies that matter most, but rather the economic environment that the president inherits upon taking office.

Consider two examples to illustrate this point. In 1980, Jimmy Carter, a Democrat, famously handed off to Ronald Reagan, a Republican, a very difficult situation. High inflation, high unemployment, and even a hostage crisis welcomed Ronald Reagan to office. In spite of this, Reagan would eventually preside over one of the strongest stock markets in history.

Fast forward to 2008, where the same thing happened, but this time in reverse. George W. Bush, a Republican, handed off to Barack Obama, a Democrat, a country in the throes of the global financial crisis. Obama enacted his policies, which I think we all could say, would have been in opposition to Ronald Reagan’s more conservative policies that he enacted during his term. And the result? Obama’s presidency also went on to preside over one of the strongest stock markets in history. So here we have two Presidents with very different policies and philosophies, who, each in turn oversaw very strong returns in markets.

These examples suggest that it may not be the president's policies that have the greatest impact on market performance, but rather the economic conditions they inherit. The state of the economy at the beginning of a presidency can set the stage for future market performance, regardless of the administration's policy initiatives.

Furthermore, the president does not operate in a vacuum. He must compromise, work with others, and eventually pass law, which may be closer to the center than at either the Republican or Democratic edge. Furthermore, Historical stock market data indicates that the market tends to perform better under a divided congress than a unified one under either party. Maybe this was the goal of our forefathers all along.

Looking Ahead to the 2024 Election

In a week, we elect a president who will inherit an environment in which the Federal Reserve is cutting interest rates, corporate profits continue to grow modestly, inflation continues to move downward, and energy prices seem to be well under control (pending Middle East fighting). Each of these variables on their own provides an excellent backdrop for risk assets to perform well.

Together they act as a powerful combination for strong economic growth and hold the potential for higher stock prices, regardless of who is sitting in the oval office next year.

www.fidelity.com/learning-center/trading-investing/election-market-impact

Conclusion

Presidential elections undeniably do influence stock market returns, especially in the near term. History shows us this, but I would argue that market performance is driven by many other factors that tend to dominate over which party sits in the White House. Economic conditions, investor sentiment, and market valuation seem to have a much greater impact on the market’s future returns. Investors should approach election years knowing that they may be more volatile, but also knowing that over the long term the stock market tends to be resilient across different political administrations…especially if the president inherits a more-than-decent economic environment.

Calvin Jung 8/5/24 Calvin Jung 8/5/24

Market Update July 2024

With the first half of the year in the books, we now seem to be rumbling towards the potential of a more volatile second half. Let’s review the past six months, and then spend most of our time looking ahead.

2024 has, so far, behaved much like the year that preceded it, at least as far as the US stock market is concerned. Strong gains in stocks, with extremely low volatility, have been in place since the start of the year. Large cap stocks have once again dominated their smaller brethren, and US stocks have significantly outperformed international equities over this time as well. You can thank a strong US dollar and a relatively strong US economy for that.

Bonds have been an income contributor in 2024, but this interest income has been slightly offset by minor declines in overall market value, as rates have risen slightly since the beginning of the year. Risk has also been rewarded in the bond market, as high yield debt has performed well, even though spreads to Treasuries remain historically narrow.

Don’t count on the rest of 2024 being that easy.

The back half of 2024 may prove to be much more challenging for a couple of reasons. Firstly, the November elections. All markets have had some practice with Presidential cycles. Even so, this one may prove to be particularly interesting. The prospect of a blurry outcome may keep markets on edge for months, even after the election has passed. Markets may take some comfort in knowing that candidate Trump was President before, but the Democrats now seem to be searching for answers, with Harris the most likely nominee, but not assured, as of this writing.

Markets, for now, seem to be taking the Democratic upheaval in stride, perhaps giving the Democrats the benefit of the doubt, at least for now. Typically, markets really begin to focus on election after the second convention; in this case, after August 19th-22nd, when the Democrats hold their convention in Chicago.

To offer some longer-term perspective, I turn to the great work of my friend and Schwab’s Chief Investment Strategist, Liz Ann Sonders. She recently analyzed Presidential returns. An investor who put $10,000 in the S&P 500 in 1961 and only invested when Republicans were in office made $103,000 by the end of last year versus $500,000 for another investor who only invested when Democrats were president. (A word to the wise: markets rise and fall depending upon many more important variables than Presidential party. Also, this is a very short time period, so please don’t think that investing under Democrats is better than investing when Republicans are in power). The punch line is this: One who stayed invested since 1961, regardless of who was President, made $5.1 million. This proves once again the old adage. It is not timing the market that is important, but time in the market.

Of course, we will be monitoring the election and its ramifications for the economy, interest rates and equity markets around the world, and want to keep this all in perspective. Which brings us to the second reason why markets may be a bit more challenged in the second half, valuation. When you remove the magnificent 7 (a group of stocks that include Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) from the calculation, stocks are trading about 18 times forward earnings, roughly in line with long-term historical norms. While this, in itself, is not a reason to become overly cautious, it is a reason not to become overly optimistic about future returns. When we include the magnificent 7 in this calculation, we find that valuations have become a bit stretched. We believe the overall theme of artificial intelligence has many years to run, but there will inevitably be pull backs in markets as this theme fully plays out. We feel we may be approaching one of those periods now. Valuations are such that many stocks within the magnificent 7 are priced based upon extraordinary growth in the future. If anything were to come along to disrupt, delay or question the viability of this growth, these stocks become ripe for correction. There are several factors now in markets which lead us to believe we may be at a near term inflection point for some of these stocks, including the fact that they are now being purchased by a very naïve investor base. These investors have historically been an indicator that popular stocks have reached their price crescendos, at least in the near term.

While we may see a pullback in the magnificent 7 in the near term, we believe that we still may be in the early innings of the AI revolution. After all, the magnificent 7 have outperformed all other public equity investments over the recent past, and while others have called for this broad phenomenon to end, we disagree. For historical perspective, let’s look at other themes to see how long they tended to last. History shows that large-cap outperformance has been going on for the better part of a century. This outperformance has sometimes lasted for decades before it switched to the next favored sector or theme. In the early 1900s, railroads dominated, followed in the 1920s and 1930s by automobiles and airplanes. Chemical stocks, along with automobile companies, dominated the 1940s to the 1960s. The 1970 and 1980s gave us energy domination as the price of oil spiked amid Middle East tensions. The 1990s gave us the Internet and the technology bubble, the period to which the magnificent 7 is most often compared, and thus seems to have brought us full circle to where we are today. Is a correction in the near-term possible, yes, but the end of the AI-themed run seems to be a long way off. On the flip side of the coin, and despite the recent move in small cap stocks, which are up 10% in just over a week, we believe you shouldn’t count on small caps to return to their past glory and so recommend that you do not chase these strong returns that may be caused by investors temporarily leaving large cap.

The main reason for this belief is that markets do not historically reset to favor small cap stocks after favoring large cap stocks in a bull run. Markets actually do tend to do the opposite. Of course there have been periods of small cap outperformance during the past 100 years, and the small cap asset class for a period of time was considered to be riskier (and still is), but also was able to provide the courageous investor with higher returns over time. This belief of small cap outperformance over time may now be false, as the most recent period has been dominated by large cap returns over small, that large cap and small cap historical returns may now be considered roughly the same, depending on what time period you use. Furthermore, with changes that will be discussed below, you could make the argument that large cap stocks offer the greatest potential for return in the public markets because of the many changes that have taken place in the small cap arena.

One of these major changes is that smaller companies are postponing going public, and staying private instead, for long periods of time. This has changed the makeup of the small-cap index significantly. Now, many companies upon going public have market caps in excess of $10 billion, qualifying them to be in mid cap or large cap indexes upon their trading debut. Small cap indexes nowadays are therefore made up of companies that went public long ago, and have not grown out of their small cap status. The opposite has also happened, as the small cap index is made up of companies that used to be larger but have fallen in market cap through poor performance and now find themselves in the small cap index instead. Add to this that earnings have also been flat in the index for the past few years and you can see why the possible conclusion that zombie companies (a company that is heavily in debt and only has enough cash to make their minimum payments) may be more ubiquitous in this index than commonly thought is quite a viable conclusion.

Small cap indexes also have large exposure to regional banks and biotech, and are thus subject to swings in these two industry groups particularly. In summary, while the second half of 2024, may prove to be a bit more difficult than the first half because of the election and the potentially stretched valuations that exist in some areas of the market, we remain constructive on markets overall. This is especially true as we look out over the next 12-18 months, and will continue to have a slight overweight to the US and to large cap stocks in particular. But we warn that volatility is to be expected as we progress through the second half of 2024. We will look to see if that volatility is projecting something sinister, or if it may instead be presenting us with a buying opportunity to add exposure to risk assets at better (lower) valuations against a backdrop of tamer inflation, a more friendly Federal Reserve, an election which will eventually be behind us and the theme of AI which may be just getting started.

Calvin Jung 6/20/24 Calvin Jung 6/20/24

Alternative Investment Perspectives

Overview

As of mid-2024, the alternative investment landscape, including private equity, venture capital, hedge funds, commodities, and real estate, remains dynamic and complex. While some asset classes face challenges, others are poised for growth driven by macroeconomic trends and technological advancements.

Timely Alternative Investment Themes

Technological Disruption
Artificial intelligence (AI), particularly generative AI, is transforming investment strategies, enhancing processes from deal sourcing to portfolio management. Although widespread adoption is still developing, AI's potential is significant.
Private Markets Under Tension
Exit activity has been below long-term trends for nearly two years, with all sectors experiencing pressure. The holding periods of buy-out-backed companies have reached historical extremes, pushing fund distribution rates to very low levels. Funds are exploring alternative routes to liquidity for investors.

Asset Class Outlooks

Private Equity

The private equity market faces a mixed outlook. The era of multiple expansion and leverage for returns has dampened. The lack of exit activity will likely push older vintage funds to provide investor liquidity with their large NAVs carrying mature companies. Private Equity Secondaries may offer an opportunistic stopgap amid the lack of public offerings and M&A activity.

Venture Capital

Venture capital is heavily influenced by AI excitement. Despite a slowdown in fundraising, significant capital raised in previous years ensures continued transactions. Companies integrating AI are expected to thrive, although the pace of market transformation poses a risk to those chasing the AI landscape.

Hedge Funds

After a positive 2023, hedge funds continue to perform well in 2024, particularly global macro multi-strategy funds. Hedge funds offer institutional portfolios diversification not found elsewhere, with managers able to go long and short across multiple asset classes through different market cycles.

For global macro managers, returns are highly sensitive to central bank policies, especially those of the US Federal Reserve. If interest rates remain high, this will continue to create yields on the short book to levels unseen since the GFC. Conversely, if the Fed cuts rates aggressively, trades positioned long at the front end and carry-based strategies will be popular.

Commodities

Gold remains a favored asset within commodities, driven by economic and geopolitical uncertainty. Regarded as a safe-haven asset, gold has low correlations with other asset classes, serving as insurance during market downturns and geopolitical stress. A weaker U.S. dollar and lower interest rates further enhance the appeal of non-yielding bullion.

Real Estate

The real estate sector is witnessing a reset in values, presenting opportunities in industrial and logistics, energy infrastructure, and some residential segments. The sector's high sensitivity to interest rates makes it volatile, yet strategically positioned investments can yield attractive returns.

Conclusion

The alternative investment environment in June 2024 is marked by both challenges and opportunities. Investors must navigate high interest rates, inflation, and geopolitical uncertainties while leveraging technological advancements and strategic sector opportunities to optimize returns. We remain optimistic about opportunities in PE secondaries, global macro hedge funds, energy infrastructure, and event-driven strategies, given the buildup of prospective transactions by venture capital and private equity holders.

Alternative investments are not suitable for all investors.

Elyxium Wealth LLC (“the FIRM ”) is a registered investment adviser located in San Mateo, California. The FIRM may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Calvin Jung 6/17/24 Calvin Jung 6/17/24

Market Update June 2024

As we look to the future, it is imperative that we see how the economy, interest rates and the stock market are positioned.

A bull market in stocks

Let’s cut to the chase. We have been in a bull market for nearly a year and a half. Bottoming in late 2022, the stock market has shown all the historical traits of a new bull run. It may be hard to believe, but stocks are up about 50% off their lows. By any interpretation, this should be viewed as a bull market. I’d like to give a quick reminder that bull markets tend to be front-end loaded, giving about half their returns to investors in the first year of the run. While we expect returns to moderate, we remain constructive on the domestic stock market and would use any pullback to add to exposure for our clients who may be underweight the asset class. We would also recommend an overweight to US stocks over international, and would urge clients to have an overweight to large cap stocks relative to small cap. Investing in private equity and venture is also recommended at this point in the economic cycle.

Interest rates remain elevated: Bonds, and even cash, offer competition to stocks, although inflation seems to be contained

It seems as though the days of zero interest rates are gone, maybe for good. For the seventh straight meeting, the Federal reserve has left rates unchanged, with a Fed funds rate now at 5.25% - 5.50%, a twodecade high. This pause has been a welcome change for risk assets of all types. History teaches that risk assets tend to perform well between the Fed’s last interest rate hike and their first (eventual) cut. This current time period has been no different, as it has led to rallies in global stocks, corporate bonds and high yield debt. While we continue to favor equities overfixed income (we recommend a slight underweight to the fixed income asset class), we realize that fixed income offers clients some very acceptable yields, and advise that clients have exposure to a broad array of fixed income assets, including Treasuries, MBS, corporates and high yield.

What time is it?

For those of you that have followed my work through the years, you know that I have communicated my views based upon a clock. The time on the clock has always been derived from a combination of both economic and market cycle variables.

Looked at through this methodology, we are between an early and mid-cycle bull market (8:00). The stock market, and most risk assets for that matter, have continued to behave in a manner consistent with a bull market that started in early 2023. This bull market has changed personalities subtly as it has aged and continues to make impressive moves upward. As of this writing, both the NASDAQ and S&P 500 are at all-time record highs, moves very consistent with other bull markets historically. We will continue to monitor the “time” closely but would continue to advise clients to make sure they have ample exposure to risk assets at this point in the market and economic cycle.

Elyxium Insights

The Anatomy of the Bull Market that Began in 2022

U.S. Federal Deficits: A Familiar Problem with Potentially Far-Reaching Consequences

Assessing the Potential Impact of a Trump Presidency on the Markets

The Impact of Presidential Elections on U.S. Stock Markets

Market Update July 2024

Alternative Investment Perspectives

Market Update June 2024

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