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ResearchTitan Annual Letter

Titan Annual Letter

Jan 11, 2024

"When the fog of uncertainty envelops our path, it is precisely then that the seeds of opportunity lie dormant, ready to sprout in the fertile soil of ambiguity." - Jane Austen


Full annual letter can be found here.

TLDR: Titan Flagship, Opportunities and Offshore strategies all outperformed their benchmarks in 2023 for aggressive investors, while our Index Investing and Alternatives strategies all exhibited positive returns with the exception of Real Estate.

See video part 2 here.


Executive Summary

We started 2023 with a heavy fog cast over the stock market from the 2022 downturn, and that fog provided the soil of ambiguity necessary for active stock pickers to shine. Beaten-down mega cap tech stocks rallied tremendously, interest rates seemed to peak, and widespread fear gave way to pockets of exuberance once again, especially in the emergent artificial intelligence domain. By the time we wrapped up the year, many folks in my network were basically shouting “we’re back, baby!”

As we kick off 2024, we maintain an optimistic outlook for stocks but do not think the “fog of uncertainty” has washed away completely yet. I’ll explain why in my commentary below, but if we’re right, that likely means we should expect a short-term stock market correction, ongoing interest rate volatility, and lots of dispersion across stocks in 2024. Fortunately, those conditions are fertile soil for the seeds of investment opportunities and active management, just like we saw in 2023.

So, for 2024, we generally advise clients to:

  1. Ensure their cash/liquidity is in a great place. I personally prefer Titan Smart Cash for mine - it’s the highest tax-advantaged yield I’ve found, with very low risk. If interest rates do indeed rise again from here, Smart Cash should take advantage of that automatically for you.

  2. Dollar-cost average into the market using recurring investments from Smart Cash into your desired mix of Managed Stocks, Index Investing, and Alternatives, if suitable. Jack, our Investor Relations Lead, is available to assist you with a personal allocation recommendation if you need help. Recurring investments basically spread out your investments over time, designed to capitalize on market volatility while not holding too much cash for too long, either. After all, we expect the long-term stock market return to be above 6%* (the highest available yield on Smart Cash)

Key Takeaways from 2023:

What Happened

Why

  • The market’s strong year was led by the massive rallies in megacap tech stocks known as the "Magnificent Seven'' (bonus points if you can list out those seven stocks off the top of your head; we owned six of them in Titan Flagship as of 12/31/23). A large part of their rebound was due to investor sentiment improving, driving valuations higher, but we saw fundamental earnings growth in the businesses too.

  • The Federal Reserve also played a central role in the market narrative in 2023. Initially maintaining a hawkish stance with rate hikes (i.e. wanting to keep rates higher to tame inflation), the Fed shifted to a dovish outlook by the end of the year, hinting at potential rate cuts in 2024.

  • The market responded positively to this shift, leading to an equity rally and a decline in Treasury yields. Inflation showed signs of moderating, with November 2023's core PCE at 3.2%, the smallest increase since April 2021. The labor market loosened, easing inflationary pressures, and consumer spending remained strong.

The Path Forward

  • We’re generally bullish on 2024 for stocks amidst the improving liquidity backdrop, inflation falling and the Fed likely unwilling to rock the boat in an election year. Relatively easy economic conditions for the foreseeable future should be good for stocks.

  • That said, we do expect a fog of uncertainty will persist for much of 2024 as investors wrestle with the pendulum swings between good and bad economic data surrounding inflation and interest rates. As the Fed has reiterated, it’s premature to call it a victory against inflation yet, but stocks are currently valued as if it’s a sure thing.

  • We also have some concerns about the narrow market leadership (i.e. weak “breadth,” or a few stocks driving most of the market’s gains) in 2023. It’s been improving recently but does signal that the rally may be a bit overextended near-term. That said, we expect any pullback would be a short-term drawdown within a bull market, not the resumption of a bear market, and we’d generally be buyers of stocks on said dips.

I want to close with some perspective. I know the last few years have seen many ups and downs in the market and in Titan’s strategies’ performance. The most important thing remains: “time in the market beats timing the market.” Expect frequent declines, and be patient. Sticking it out year after year is the cost of earning strong long-term returns.

And historically it has paid to do so, as the chart below shows (courtesy of J.P. Morgan). Over the last 44 years, the S&P 500 has seen an average intra-year decline of 14.2%, yet annual returns were positive in 33 of those years (75% of the time). Time in the market.

To sum up: while we expect a market correction to occur and volatility to persist in 2024, we believe it’d be a healthy pullback within a broader bull market. Thus we generally advise dollar-cost averaging from Titan Smart Cash into a diversified portfolio of Managed Stocks, Index Investing, and potentially Alternatives depending on your risk tolerance, liquidity needs, and time horizon.

Yours,

Clayton Gardner

Co-CEO & Chief Investment Officer

Cash Management

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