After conversations with many of you over the past few weeks, I now realize that you have missed my voice; My personal perspective on the forces affecting
the markets and economy – both good and bad!

After 15 years, a return to normal will not be without discomfort.  We make the best decisions we can based on what we know about the past; principals we
trust – diversification, the dangers of market timing.

I have also heard your concerns about your portfolios moving sideways/lower after significant losses in 2022.  A few days ago, stocks moved below their 200day moving averages.  Two weeks ago, this could have been viewed as a point of capitulation – that we might see a return of the broadening market that was indicated in June.  Now we have new concerns about the Israeli-Hamas (++) war going regional and that puts pressure on stocks.  We continue to monitor the risks of continued inflation and potential bank failures.  All that said, economic indicators are turning up, indicating an acceleration of corporate profits and cash flows in 2024.  These two extremes will be competing, causing significant volatility if and until resolved.

Here is a Yahoo Finance chart of the S&P 500 from 1/1/2009 through 10/24/2023:

It is clear, visually, that the Fed holding interest rates at zero (Quantitative Easing) to “save us” from the 2008 financial crisis led to ~15 years of irrational bull markets.  This was an anomaly.  The markets from 2009 through May 31, 2023, were not “Normal” but have influenced our expectations.  The market reactions to the economy and geopolitics since June this year are more rational, but we feel as if we should be doing much better.
As you can see on the chart, another reason we think we should be doing better is because the “Magnificent 7” (Microsoft, Apple, Meta, Google, Nvidia, Tesla, & Netflix) caused huge gains in the Nasdaq and S&P in the first half of this year. If you participated, you are still holding onto some of those gains.

We did not participate.  I chose not to participate then and continue to believe they are very, very risky.  They led the market down in 22 and are doing the same in the second half of this year.  I choose instead, to participate in the S&P which not only holds these 7, but is highly diversified and includes 493 additional positions that appear to be coming out of an earnings recession.

In addition to the S&P, I continue to hold normal weights of Small and Mid-size companies of the Russell 2000 which are performing at negative rates.  The Magnificent 7 have a market cap 4.5 times that of the Russell 2000.  Richard Bernstein posed the question in his recent commentary, “What if 5% of the Magnificent 7 sold off and went into the Russell 2000?”  The Russell could go up ~20%.  That’s what happened when the tech bubble burst.

I’m also reading a lot about the bond market not acting rationally.  I am not sure I agree.  While the rate of inflation has gone down, inflation is still going up – just by less.  More slowly.  The Fed has promised us more rate hikes if inflation continues, and economic indicators are saying that the economy is taking off – not slowing.  The stimulus injections since Covid have not been depleted.  Congress just named a hawkish Republican as Speaker of the House.  If he is effective, this could mean the issuance of less debt and a tighter budget, potentially raising interest rates further since supply will be reduced.  Depending upon the size of your portfolio, now may be the time to fill your bond asset allocation with high-coupon, investment grade bond ladders.

Don’t hesitate to call with questions or comments.  I always love to chat.  With the holidays upon us, and so much happening in the markets, we are scheduling review meetings early this quarter, many before Thanksgiving.  I look forward to talking with you then.