Strong first half for markets forces advisors to defend pessimistic outlooks

With the first half of the year on the books, financial advisors who were able to catch the wave of growth and technology stocks are likely feeling good about what lies ahead, even if that is clouded somewhat by the reality of inflation and the risk of a recession.

The closely watched S&P 500 Index gained 17% over the first six months of the year, which stands in stark contrast to its 22% decline in 2022. But while the S&P got off to a strong start to the year, its performance pales in comparison to the meteoric growth of certain investment categories and strategies.

Consider, for example, the 349% first-half gain by GraniteShares 1.5x Long NVDA Daily ETF (NVDL), the 332% gain by MicroSectors FANG 3X Leveraged ETN (FNGU), or the 101% gain by ProShares UltraShort Bloomberg Natural Gas ETF (KOLD).

“Leveraged and growth and technology strategies have done the best this year, and bitcoin or anything related to blockchain also did really well,” said Todd Rosenbluth, director of research at VettaFi.

However, he added, the flow of assets suggests investors and financial advisors haven't just been chasing the hottest performers.

The most popular ETF this year is the boring old Vanguard S&P 500 (VOO), which saw $18.5 billion worth of net inflows.

The next two biggest asset gatherers after VOO also suggests a focus on core allocations. The iShares 20+ Year Treasury Bond ETF (TLT), which is a safe haven play and recession hedge, took in $10.3 billion this year. Right behind TLT, with $9.7 billion worth of net flows in the first half, is iShares MSCI USA Quality Factor ETF (QUAL), which offers exposure to solid blue-chip stocks.

Marc McLean, owner of McLean Financial Planning & Investment Management, said the strength of the broad markets has made it easier to avoid the noise of the outsized performers.

“The S&P 500 and Nasdaq indexes have performed better than most people expected in the first half of 2023, and that is mostly due to AI-related companies and the excitement around AI in general,” he said. “The concern is what happens when that excitement is over. Looking at economic data, I'm preparing clients for another correction.”

Tim Holsworth, president of AHP Financial Services, has a similar message for clients.

“We haven’t made any adjustments because we’ve been growth- and tech-oriented for years, and that wasn’t so great for 2022, but it’s working again this year,” Holsworth said. “We’re staying in short-term cash with new money, as we are hesitant to buy stocks before we see some sort of pullback. We are telling clients to not expect much for the remainder of the year in additional gains and do expect a short-term pullback of some sort by fall.”

But while some advisors are planning to play it close to the vest from here, it's hard to ignore momentum and history.

According to Trading.biz, over the last 20 years, the best months of the year for stocks have been April, July and November. The S&P has averaged a return of more than 2% during those months. Between 2003 and 2022, the S&P 500 moved higher in 15 out of the 20 Julys, with an average gain of 2.3%.

Matt Spradlin, director and wealth manager at Godfrey & Spradlin Private Wealth Advisory, is keeping his clients fully invested for as long as there’s pessimism overshadowing the markets.

“We got aggressive in December and we’re going to continue to climb the wall of worry,” Spradlin said. “I’m still bullish on the rest of the year because I think there’s some legs in this market. I wouldn’t be piling up cash right now.”