Weekly Update (07/24 – 07/31): Examinations of Risk

Hi all –

In this brief weekly update, we want to challenge the idea presented by the media that risk is equal to standard deviation (i.e. Volatility, how much stocks move around). Many top investors such as Howard Marks define risk as a permanent loss. According to Warren Buffett, volatility means opportunity for patient investors. The way he has described this in the past is by saying “we prefer a lumpy 15% return to a smooth 12% one.”

Recent research from the CFA Institute has shown that equities remain an excellent hedge to high inflation. They run the numbers since 1875 and find quite decisively that equities perform the best in a range of inflation between 0-4%, a range of inflation we now seem to be approaching. Link to the article: https://doi.org/10.1080/0015198X.2023.2185066

Within Equities, they break returns into factors. “Momentum” as a factor (YoY Performance) is by far the most powerful factor (in line with our growth focus.)

Many media participants who talk about the market seem to be fixated on year-to-date returns of some of the growth stocks being very high. They use this as evidence that the market will probably go down from here. In our view, this myopic analysis is tantamount to a Doctor judging a patient’s recovery from an operation or long-term disease by looking at the year-to-date recovery. In an analogous scenario, the Doctor would say “well year to date performance has been good, this can’t possibly keep going, so we expect a relapse.” Rather, our understanding of the way such things would work would be to look at a baseline from prior to the COVID distortions and related inflation – the market is looking to get back to this “baseline,” just like our fictional patient.

Staying with this line of thinking, many of the “magnificent seven” growth are still trading well below their levels prior the inflation of 2022. The stocks range anywhere from Tesla (still 37% below all time highs) to Amazon (32% below all time highs) to Microsoft (2% below all time highs). In fact, only two of this group have eclipsed their prior highs; Nvidia and Apple.

We believe the A.I. narrative in the market is compelling, but is still very early stages. It will lead to large productivity gains. But the airtime it gets is also “crowding out” dozens of other great technological themes. To name just a few of our favorites:

Home-Sharing – we believe Air-b-n-b has begun to revolutionize the vacation and is accelerating, many of its characteristics remind us of an early Facebook

Autonomous Driving – as machines become better at driving vehicles, companies like Tesla with a first mover advantage will eventually be a disruptive part of the economy, replacing truck drivers/ limo drivers with advanced technology

Drones/ E-commerce – an analog to autonomous driving, companies such as Amazon who operate large e-commerce departments but do so at a financial loss, may soon be able to turn these losses into huge profits

In the vaccine space, the new and successful Merck skin cancer vaccine trials are encouraging and could be a game-changer, they also hold implications for other cancers

There have finally been meaningful steps taken in Alzheimer’s treatment with related adoption by Medicare/ Medicaid. With blood tests on the horizon, it will “lower the bar” for millions to get tested and treated, which itself could unlock a wave of “productivity” if many more folks are living longer, and needing to work longer in order to survive

As always, please do not hesitate to reach out to us with questions. Thank you for your trust and confidence.

John Bay, CFA, UCLA MBA

Chief Market Strategist

Meet the Marathon Team

Charles G Brown, IV | Chief Executive Officer, Financial Advisor | cgbrown@meetmarathon.com

Jacob Foley | Chief Operating Officer | jfoley@meetmarathon.com

Connor Gallivan | Financial Advisor | cgallivan@meetmarathon.com

Indrani Namilikonda | Client Services Coordinator | inamilikonda@meetmarathon.com

REQUIRED DISCLOSURE:

Investment advisory services provided by NewEdge Advisors, LLC doing business as Marathon Financial Group, as a registered investment adviser. Securities offered through NewEdge Securities, Inc., Member FINRA/SIPC. NewEdge Advisors, LLC and NewEdge Securities, Inc. are wholly owned subsidiaries of NewEdge Capital Group, LLC.

The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying to this message is strictly prohibited. If you have received this message in error, please immediately delete.