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2023: Annual Letter
Dear AL STOCK TRADES Community,
As we reflect upon the previous year, we are delighted to present our annual report for 2023. Despite a year fraught with challenges and uncertainties, we have witnessed remarkable resilience and growth. Notably, our January stock picks have yielded a 114% return year-to-date, while our ongoing top semiconductor stocks have recorded a historic 79% return. Additionally, this report will unveil our portfolio hedge - an 18-year back-tested proprietary portfolio modeling system, which has collectively compounded to an impressive 1205%, equating to a compounded annual growth rate of 67% over 18 years.
When analyzing the performance of our carefully chosen stocks, the total market capitalization gain amounts to an astounding $2.23 trillion. This remarkable growth showcases the strength and potential of our investment strategy.
In the face of soaring inflation, aggressive Federal Reserve actions, and the looming threat of a global recession, we have successfully navigated these uncharted waters. Our agility and ability to adapt have been instrumental in our sustained success.
This report provides an in-depth analysis of the key events that have shaped the stock market in 2023, including the impact of the Federal Reserve's policy shifts. It also offers valuable insights into the upcoming year, as we believe that understanding our past sets a foundation for future success.
We extend our deepest gratitude to all members of the AL STOCK TRADES community for your unwavering support and trust. Your confidence fuels our commitment to excellence.
Looking ahead to 2024, we are steadfast in our commitment to delivering exceptional results and fostering long-term value for the retail community space. With a strategic emphasis on innovation and adaptability, we are well-prepared to thrive in the dynamic market landscape.
Once again, thank you for your continued trust. We eagerly anticipate the opportunities that lie ahead and are excited to embark on another prosperous year together.
Sincerely,
Albet Alan CEO/Founder, AL STOCK TRADES
Our Top 2023 Stock Picks: Outstanding Performance and Future Trends
It is with great honor and privilege that we present to you our top stock picks for 2023. Since January, our selections have yielded a remarkable 114% return year-to-date, surpassing the performance of most global institutional hedge funds
Among these selections is Clover Health, which has demonstrated a modest year-to-date return of 7%, marking it as our least performing asset. Excluding this particular stock, our portfolio would have achieved an impressive 150% return year-to-date.
Looking ahead, we anticipate a significant inflow into small-cap stocks in 2024 and beyond, especially with a dovish Federal Reserve poised to decrease interest rates. We believe this economic climate will be particularly favorable for Clover Health, positioning it to capitalize on these trends.
Furthermore, it is noteworthy that in the latter half of 2023, we recognized the potential of Enphase Energy, which has since returned approximately 80% following our analysis of its intrinsic value.
Upon analyzing our top stock picks, it is evident that our selection has collectively accrued a total market capitalization gain of $512 billion, as illustrated in the image below.
In summary, our top stock picks have achieved a commendable 91% net return year-to-date, significantly outperforming the S&P 500.
Our Top Semiconductor Plays: Exceptional Performance and Intrinsic Value Analysis
This analysis has yielded an astonishing net return of 79%, significantly outperforming the S&P 500. Notably, one asset particularly stood out, delivering over 30% returns before reaching its intrinsic value, thus emphasizing the critical importance of valuation calculations.
Furthermore, our top semiconductor stock picks, it is evident that our selection has collectively achieved a market capitalization increase of $459 billion.
When we isolate that specific ticker, the returns are an impressive 90%. However, for simplicity, we shall adhere to the net return of 79%, which continues to outperform key benchmarks across various measures.
Portfolio Hedge Strategy: Proprietary Modeling and Impressive Performance
Get ready to discover our portfolio hedge strategy, derived from an 18-year back-tested proprietary portfolio modeling system. With an impressive return of approximately 37% year-to-date, it's a proven approach to safeguarding your investments.
Examining our portfolio's hedge regarding our 2022 stock picks, it is evident that our selections have collectively gained $1.2 trillion in market capitalization.
Enhanced Performance Metrics: Unveiling the Power of our Portfolio Hedge
Here, we present an enhanced analysis of performance metrics for our portfolio head strategy, employing an 18-year back-tested proprietary portfolio modeling system. This rigorous methodology has produced a commendable year-to-date return of approximately 37%. It is important to note that, upon adjusting our calculations to exclude "orange stocks," which are typically non-tradable on most retail investing platforms, our performance markedly improves to a 43% return year-to-date.
Examining the second backtest model of our 2022 selections, it is evident that our choices have collectively gained $62.7 billion in market capitalization.
Total Market Capitalization Gain: Impressive Growth in our Selected Stocks
When analyzing the performance of our carefully chosen stocks, the total market capitalization gain amounts to an astounding $2.23 trillion. This remarkable growth showcases the strength and potential of our investment strategy.
Enhancing Portfolio Analysis: A Comparative Evaluation
Introducing vibrant coloration and expanded 18-year retrospective evaluation of the proprietary portfolio modeling system delivers valuable insights. Compare our model's rigorous back-tested performance against esteemed benchmarks like S&P 500, NASDAQ 100, Dow 30, and Russell 2000. With a solid blue line, our model consistently outperforms all indices, showcasing an average compounded annual growth rate of 67% over 18 years. Experience sustained and robust growth with a compounded return of 1,205%.
Witness the investment trajectory, starting with $1 million in 2006 and subject to annual rebalancing. As of January 1st, 2023, the portfolio remarkably appreciates to $12 million, showcasing 18 years of remarkable growth.
Macroeconomic Headwinds and Early Market Malaise
The year commenced with the echoes of 2022's brutal bear market. Inflation, fueled by pandemic disruptions and the Ukraine war, remained stubbornly high. The Federal Reserve, determined to tame the inflationary beast, embarked on a series of aggressive interest rate hikes.
These tightening measures, while necessary, raised fears of an economic slowdown, sending shockwaves through the stock market.
Macroeconomic Headwinds and Early Market Malaise
The year commenced with the echoes of 2022's brutal bear market. Inflation, fueled by pandemic disruptions and the Ukraine war, remained stubbornly high. The Federal Reserve, determined to tame the inflationary beast, embarked on a series of aggressive interest rate hikes.
These tightening measures, while necessary, raised fears of an economic slowdown, sending shockwaves through the stock market.
Turning the Tide: Signs of Hope and the Pivot Begins
However, cracks in the bearish narrative began to appear as early as the summer. Inflation, while still concerning, showed signs of cooling. The job market remained surprisingly strong, defying predictions of widespread layoffs.
Meanwhile, corporate earnings, though impacted by rising costs, held up better than anticipated. In June, the Federal Reserve, acknowledging the improving economic data, hinted at a potential slowdown in its rate-hike pace. This subtle shift was enough to ignite a nascent bull market.
The Great Pivot: From Hawk to Dove – The Fed Takes Center Stage
The pivotal moment arrived when the Federal Reserve officially signaled a policy pivot. Following weaker-than-expected inflation data and dovish remarks from Chair Jerome Powell, the central bank indicated a willingness to pause or even slow down its rate hikes.
This change in tone sent shockwaves through the market, sending indices soaring. Investors, relieved by the prospect of easing monetary tightening, poured back into equities, propelling the stock market into a sustained rally.
The Magnificent Seven Soar, Smaller Caps Shine
The post-pivot rally was not evenly distributed. The so-called "Magnificent Seven" – leading tech giants like Apple, Microsoft, and Alphabet – led the charge, driven by their strong balance sheets and resilient earnings.
These tech behemoths, having been battered in 2022, enjoyed a spectacular comeback, with some doubling or even tripling in value by year-end. Meanwhile, smaller companies, particularly those in cyclicals and consumer discretionary sectors, also gained traction, benefiting from the improving economic sentiment.
Geopolitical Turmoil and Energy Woes
While the year ended on a positive note, it wasn't without its share of challenges. The ongoing war in Ukraine continued to disrupt global supply chains and fuel energy price volatility.
Geopolitical tensions in other regions, from the Taiwan Strait to the Korean Peninsula, further added to market uncertainty. These external factors kept investor sentiment on edge, occasionally triggering temporary bouts of volatility.
2024: Cautious Optimism and Key Trends to Watch
As we turn the page to 2024, the stock market landscape appears cautiously optimistic. Inflation, while still above the Fed's target, is expected to continue its gradual decline.
The central bank, though unlikely to resume aggressive rate hikes, is fighting between crossroads to cut rates significantly in the near future. This scenario suggests a potentially range-bound market, with opportunities for both growth and volatility.
The Fed's Dance: A Key Trend to Watch in 2024
The Federal Reserve's actions remain paramount. Any hint of a renewed hawkish stance could trigger market corrections. Conversely, dovish signals could further fuel the bull market.
Corporate earnings will be closely scrutinized. Companies navigating rising costs and a potential economic slowdown will need to demonstrate agility and resilience to maintain investor confidence.
Geopolitical Wildcards: A Persistent Uncertainty
The Ukraine war and other global hotspots remain wildcards. Escalating tensions could disrupt markets, while progress towards resolution could boost sentiment.
Sector rotation could see increased attention in 2024 if the economic recovery broadens, with energy and financials potentially in the spotlight.
The Rise of Alternatives: Diversifying Portfolios
With continued market uncertainty, investors may continue to allocate more capital to alternative investments like real estate and private equity.
This diversification can help mitigate risk and provide potential growth opportunities outside of traditional stock market investments.
Money Market Funds: A Shift in Focus on Wall Street
2023 has seen a surge in interest in money market funds, attracting approximately $1.3 trillion. However, the perceived lucrativeness with returns of 5 to 6% proved incorrect as the NASDAQ experienced remarkable growth. With rate cuts and anticipated shifts, investors are likely to redirect investments from money market funds to stocks, potentially reallocating trillions of dollars.
A Year of Resilience and Pivots
2023 was a year of surprises and pivots. After a turbulent start, the stock market surprised everyone with its resilience, fueled by easing inflation, a dovish Fed, and strong corporate earnings.
As CNBC continues to spew out misinformation, many hedge funds are capitalizing by taking advantage of the new trend regarding small caps.
Small Caps vs. Large Caps: A Historical Perspective
If you take the Russell 2000 divided by the S&P 500 and look at the price-to-book ratio and relative price ratio, you can see that as large caps have outperformed, the overall numerical value has led to a decrease in the ratio between small caps and large caps.
The last time we saw this disparity was from 1999 to 2001. If you examine the overall graph, after there was a bottom in the disparity between the Nasdaq-100 index and small caps, small caps outperformed for approximately +9 years.
Russell 2000 ETF (IWM) Breakout
The Russell 2000 ETF (IWM) has recently broken out. This breakout is seen as the beginning of a period where small-cap stocks are expected to outperform, with anticipated high double-digit returns.
This movement is supported by the technical pattern of breaking past resistance levels that have been tested multiple times since August 2022. Now that the breakout has occurred, a noticeable gap around the circular point has been observed, indicating market technicians on Wall Street are recognizing this change in trend.
Market Trends and Projections
Building upon our previous discourse, we are nearing a pivotal moment in market trends, potentially achieving all-time highs within days. Our analysis suggests that, following significant drawdowns, the maximum gain over the ensuing 18 months could be as much as 22%.
However, historical patterns indicate that seven out of eleven times, these proximities have been followed by a pullback. As such, it would not be surprising to witness a similar retracement, especially given the anticipatory stance of numerous market participants.
Investor Sentiment and Market Dynamics
In 2023, a considerable number of investors remained cautious, bracing for a recession. Yet, the current market sentiment leans more towards optimism, with prevailing positive indicators overshadowing the negatives.
This optimistic outlook is particularly pronounced for the latter half of 2024, where institutional investors foresee substantial gains. It is important to note that while our discussion predominantly revolves around the S&P 500, the dynamics for small-cap stocks diverge and warrant a separate analysis, as highlighted in our earlier posts.
Presidential Election Cycles and Market Performance
We estimate that the market may require up to three-quarters of a month to establish new all-time highs. The likelihood of witnessing substantial gains is robust, with a singular exception noted in 2007 when the increases were relatively modest, ranging between 3-4%.
Furthermore, our historical analysis of presidential election cycles leads us to anticipate vibrant market shifts post-April in the second half of 2024, particularly affecting the S&P 500.
Forward P/E Ratio Analysis
Upon analyzing the Forward P/E ratio in relation to the S&P 500, which is presently at ~17x, excluding the FANG stocks would lower the forward P/E ratio to ~15x. From this perspective, this represents an attractive multiple, suggesting that for every $15 invested, a $1 return is expected, as per insights gained from the Mastering Stock Market course.
The market is anticipated to recalibrate itself as the 10-year federal note reverts to the mean within its descending channel.
FANG Stocks and Financial Sector Valuations
When isolating the FANG stocks and the so-called "Magnificent Seven," they trade at 25x earnings. Considered the gold standard of companies, this valuation is not overly expensive.
In light of the Silicon Valley Bank collapse, the financial banking sector has not witnessed market inflows, presenting what contrarian investors might see as a ripe opportunity. The sector is trading at a 13 times forward P/E ratio, which is significantly undervalued.
Wall Street's Outlook for 2024 and Beyond
Consider the following criteria in anticipation of Wall Street's outlook for 2024: Inflation trends, Federal Funds Rate expectations, and productivity gains from the artificial intelligence boom and increased investment in automation.
These variables, as they shift, are likely to bolster overall market growth, enhance consumer sentiment, and stimulate demand, thus creating a positive feedback loop. However, current consumer sentiment metrics, such as those from the University of Michigan, indicate widespread economic concern among consumers, largely attributable to unprecedented rate hikes by the Federal Reserve in the nation's 250-year history.
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