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“Economists have a mystique among social scientists because they know mathematics. They are quite good at explaining what has happened after it has happened, but rarely before.”

-Daniel Kahneman, 1934-2024

Thinking Fast and Slow

This makes three times in the past year that we’ve paid homage to one of our heroes who passed away. Kahneman’s work on behavioral finance won him a Nobel Prize in Economics in 2002, for “having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.”

As an investor yourself, it’s probably become clear that there is more to markets than simple math equations, namely those three items in his profile:

  • Human judgment
  • Decision-making
  • Uncertainty

Kahneman was never a portfolio manager, but his body of work inspired many of us to integrate the human element into investment planning. It’s now commonly accepted that the pain of loss is much greater than the pleasure of gain, estimated at 2:1 in his work on “prospect theory.”

This is why we can still feel sad for our sports teams, even with the general success of our local teams in recent years. And it’s why it makes sense to have a defensive sleeve—part to have investments zig while others zag—but also to reduce the chance of extreme emotions during rocky markets.

In any case, Kahneman is one of the giants of the past fifty years, and we’re thankful for his work and how it has helped shape our understanding of the human component of investing.

Market Review

The first quarter was very strong; much of it centered on (human) optimism that inflation has been broken and that rates can work back down. While we’ve seen inflation fall from the highs of 2022, we’ve not yet seen the “last mile” improvement back into the 2% range our Federal Open Market Committee (FOMC) has set as its target.

While the bond market has been sideways during this period of disinflation from those 2022 highs, the stock market has been strong. Why? Because the stickiness of inflation has been directly related to strong employment and general economic activity.

Ultimately, most things we think can slow or boost the economy are a sideshow. There are marginal impacts elsewhere, but it basically comes down to “Are people spending money?”

Source: JP Morgan March 2024

So, while the level and direction of interest rates remain a concern, the resilient economy triggered a stock rally from November through March that was in the top 1% of U.S. market history for any 5-month period. We have a defensive sleeve to protect portfolios when stocks fall, but these past months show why we also have a growth sleeve.

Q1 Actions 

Models have owned risk-appropriate levels of Bitcoin for several years now. The only trade for the quarter was a swap in Bitcoin holdings for those clients that would not experience a large tax gain. This change resulted from the SEC approval of spot Bitcoin ETFs, which drove the proliferation of new and much less expensive options.

We chose the Fidelity Wise Origin Bitcoin Fund (ticker: FBTC) because it had a competitive fee, and we felt that it was differentiated amidst competitors given the investments Fidelity has made in the cryptocurrency space. We still like the ability of Bitcoin to zig while other holdings zag.

The significant drawdown or volatility in Chinese equities continues to be a discussion in our reviews. It is a modest exposure in global stock benchmarks, but its larger influence on the global economy warrants attention. China continues to deal with significant issues in its real estate sectors that have flowed throughout its entire economy, impacting business and consumer confidence. Given the challenges faced here, we remain underweight but maintain modest exposure in the event their efforts to stimulate their economy are successful.

Risks and Outlook

With businesses generally in good shape fiscally, we see three main themes driving markets in 2024:

  • Interest Rates
  • Corporate Earnings
  • 2024 Election

For perspective on each, let’s look at some graphics:


Some context on the history of interest rates is important:

  1. The chart above shows the amazing benefit of buying high-coupon late 70s/early 80s-vintage bonds when no one wanted them.
  2. The tailwind of falling rates made earlier bond purchases even more valuable relative to their newly issued, lower-coupon peers.
  3. During the COVID period, not only were (nominal) coupons low, but real rates (nominal minus inflation) went negative for a couple of years.

This was the catalyst for the reconstruction of our defensive sleeve, significantly reducing our exposure to bonds and seeking protection through several alternative asset strategies. The world was accepting negative real yields. We wouldn’t. While uncertainty still reigns in the bond market, we at least take comfort that some sanity has returned and that we’ve at least been able to again consider traditional fixed-income securities as a part of our defensive sleeve.


Earnings estimates for large-cap stocks (S&P 500) indicate a trough behind + growth ahead, and small-cap stocks (S&P 600) look poised for the same pattern with a one-quarter lag. A broadening of earnings growth, with less reliance on the mega-tech companies at the top, would be good for the market’s overall foundation.


It’s an election year, and as much as the media will obsess over the impact, there’s been a reasonably consistent pattern for the Presidential cycle. As you can see from the chart above, this cycle follows the pattern very closely.

Each of these areas brings risks and opportunities, but none warrant significant changes at the moment. As Kahneman said, “Confidence is not a very good indicator of accuracy.” However, the most accurate prediction we can make is that “experts” on all sides will offer evidence to support their chosen view.



With endless negative headlines from the “financial entertainment complex,” inflation ambiguity, and continued global geopolitical uncertainty, it may be tempting for some investors to stockpile cash. However, short-term comfort comes with significant costs, and with purchasing power constantly eroded, we think it’s important to own assets that can actually grow.

Active managers in the defensive portfolio made significant contributions in Q1. At this point in the bull market, we are very pleased with our mix of index and active strategies in growth portfolios. Investors should expect election-related prognostication to only increase in the coming months. Currently, corporate balance sheets remain strong, and U.S. consumers continue to spend with confidence. We remain optimistic about American economic grit and resiliency. Investors should remain focused on the long term. As always, we appreciate your trust and welcome your feedback.