October 31, 2023 (3rd Quarter 2023)
The stock market declined in the 3rd quarter, with the S&P 500 falling -3.5%. Market breadth continues to be a problem with Tech type stocks accounting for the bulk of this year’s gains. The broad S&P 500 Equal Weighted Index is basically flat (up only 0.31%) year to date. The difference is striking, the top 7 stocks (by weight) in the S&P 500 (Apple, Alphabet, Microsoft, Nvidia, Meta, Amazon and Tesla, which account for over 25% weight of the index), are up an average of over 80% for the year. Compare this to the S&P Equal Weight index (essentially the average of all 500 stocks in the index, not weighted by company size), has essentially no gain for the year. This illustrates the lack of “breadth” in the market. Moreover, as of today (10/31/2023) the other S&P 500 sectors performance YTD outside of the Tech type sectors are as follows: Consumer Staples -9%, Industrials 0%, Financials -6%, Healthcare -8%, Materials -2%, Energy -2%, Real Estate -12%, and Utilities -16%.
Interest rates remain a key factor for the market, and as long-term interest rates rose during the quarter, the stock market declined. While the FED left short-term interest rates unchanged at their last meeting, they signaled that possibly additional rate hikes may be warranted and that the short-term FED rate would stay at these levels or higher for a good while to stave off inflation. While the economy has held up ok from these tightening financial conditions, the effects are starting to show and weaken the economy. With all this, the stock market will continue to be challenging, probably through the fall/winter months as the economy seasonally weakens from high summer activity. Money market funds continue to look attractive safely yielding over 5%. The good news is that stock prices overall don’t seem to be overvalued, even in the high-flying Tech area, and other areas of the market look attractive from a valuation standpoint.
2nd Quarter 2023
The stock market continued to gain in the second quarter, with the S&P 500 advancing over 9%. However, the broader S&P 500 Equal Weight index only gained 2% for the quarter. Market breadth continues to be narrow with Tech type stocks having outsized gains compared to other areas of the market. Tech stocks, particularly large tech, have gained around 40% this year, while the rest of the market is up only around 5%, a striking difference. This is evident in the difference between the S&P 500 index (up 15.91% YTD) and the Equal Weighted S&P 500 index (up 5.94% YTD), a difference of 10%. With this outperformance in Tech stocks this year, it’s important to note that from the start of last year (01/01/2022) to date, Tech stocks overall still haven’t fully recovered (still have negative performance), the NASDAQ is down around -12% vs. the S&P 500 down only -6% in that time period.
Interest rates continue to be a key to the markets. Long-term interest rates have remained steady for the year even though the FED has increased short term rates. The FED has stated they are committed to keeping rates at these levels for a good while to abate inflation. Long-term rates (which are more economic and market sensitive) have been steady but could rise some. This environment in rates has made cash money markets attractive at around 5%. However, the bond market is still too risky and best avoided in my opinion. The banking crises earlier this year abated as fast as it started it seems, with no real solution, which has been somewhat ridiculous. I expect the second half of the year to be choppy for the markets but with a needed broadening in individual stock returns and if long-term interest rates can stay relatively stable, the recovery in the stock market can continue.
1st Quarter 2023
The stock market gained for the first quarter of 2023. The S&P 500 was up 7% but the more indicative Equal Weight S&P 500 only gained 2.40%. Market breadth has been very narrow. What drove the returns were large Tech and higher priced stocks (Apple, Alphabet, Amazon, Meta, Microsoft, Tesla etc.) which gained dramatically in the quarter. These six stocks averaged a gain of 38%, and the overweight of these six stocks in the S&P 500 index is over 22%. This was most prevalent in the difference between the Dow Jones Index, which was virtually flat for the quarter (gained 0.38%), and the NASDAQ index which gained 16.77%. These outsized returns in large Tech and other type stocks don’t seem to be sustainable and will more than likely correct during the year.
The banking crisis, with Silicon Valley Bank (San Francisco) and Signature Bank (New York) going bankrupt, has caused turmoil in the financial sector. While these were relatively unknown banks before the crisis, they were very large banks, constituting the 2nd and 3rd largest bank failures in US history (Washington Mutual being the largest in 2008). While these seem to be isolated incidents, the issues are real, with large uninsured deposits, and it has affected all financial stocks. The FDIC was created literally to ensure depositors’ confidence that their money is safe in banks, preventing bank runs. With bank runs on Silicon Valley and Signature the FDIC failed and will need to be overhauled to fix the issue. The FED raised interest rates during their last two meetings (in the middle of this banking crisis), but long-term rates have been rather stable, and the FED is probably close to ending their increases in interest rates. Inflation, while abating some, is still a factor and should prop up interest rates to some extent, particularly short-term rates. This year will likely be choppy, with the threat of a recession and the FED determined to keep interest rates at these levels for some time. However, the back half of the year may be promising once there is more clarity on the economy and the FED.
4th Quarter 2022
The stock market finished down for 2022 with the S&P 500 losing -18.11% for the year. Historically, the stock market only had 3 other down years of -15% or more in a single calendar year since 1940 (2008, 2000, and 1974). However, worse was the bond market relatively, which finished down -13% for the year, the worse single year ever for bonds going back to and including the Great Depression. There has never been a calendar year where the bond market AND stock market finished down more than -10% each going back through the Great Depression. Normally, bonds act as a buffer for stocks and usually produce positive returns in a bear stock market, but last year was different as high inflation caused interest rates to rise from a very low base. Money market cash has been some of the best investments this past year, and are yielding attractive and safe rates (above 4%).
Inflation and interest rates continue to be the key to the stock market. It seems inflation is improving (falling) and interest rates, while rising, remain moderate. The FED has stated they will continue raising interest rates for the next few meetings and keep them elevated for a while to stave off inflation. They also want to bring balance to the labor market as there are an estimated 10 million job openings. The FED’s interest rate raises have caused the economy to slow some, and will continue this year, which will help with the imbalance in the labor market and inflation. As long as inflation keeps abating, interest rates should stay moderate, and the stock market can recover.
3rd Quarter 2022
The bear stock market continued in the 3rd quarter. While the day-to-day volatility in the quarter was high, the S&P 500 index was down -5% in the quarter, while year to date the index is down -24%.
Inflation and interest rates are the key to this stock market. The FED continued to increase short-term interest rates during the quarter and more importantly, long-term interest rates increased also. While long-term interest rates have risen, they are still historically modest at around 4%. Previous periods of high inflation (1980’s) saw interest rates much higher. The famed economist Milton Freedman once said, “inflation is always and everywhere a monitory phenomenon, in the sense that it can only be produced by a more rapid increase in the quantity of money than in output.” The money that was created during the pandemic through the much-needed government relief programs was unprecedented, and eventually caused this inflation. Supply chain issues, supply push and demand pull, these are merely symptoms of the underlying root of inflation. However, if long-term interest rates can stay modest, the market can start to recover.
There are signs that inflation is easing, as commodity prices have eased, and supply chain issues are improving. The FED’s increase in interest rates has started to cool the overall economy (demand). It’s unclear when the FED will ease their financial tightening campaign. They may be getting close however, as there are signs inflation is moderating in areas. The good news (for stock investors) is that companies eventually pass on rising costs to customers, and their profits recover, as well as their stocks in the long-term. Bond investments and funds have continued to be poor investments, losing -15% on average this year, and best avoided. Cash money markets have been the safest and best. Overall, the stock market at these levels is starting to look attractive.
2nd Quarter 2022
The US stock market plunged in the 2nd quarter and officially entered a bear market (down 20% from a previous peak) on June 13th, when the S&P 500 closed at 3,750 ending the bull market that began during the pandemic in March of 2020, a rather short bull market at just over 2 years. The gain in the bull market in that period was 114%, annualized at over 50%/year, very good returns over the short period. Bear markets don’t happen very often, including the current one, there have been 5 in 40 years (1987, 2000, 2008, 2020, and currently 2022). While bear markets can last a long time (typically over a year from peak to trough), we’re already 6 months from the start, and stocks will eventually recover.
All bear markets are different, caused by different circumstances, and are unpredictable in severity and length. Historical averages and technical trends don’t matter, despite what some financial commentators suggest. The culprit this time is inflation along with a Federal Reserve that is increasing interest rates to tighten financial conditions. The Russian-Ukraine war has sent Oil prices soaring, one major component of the inflation, but prices for most commodities and goods have increased substantially also. The FED’s purpose in raising interest rates is to slow the overall economy (demand) to relieve supply chain issues and in turn inflation pressure. In some areas this will be effective, while in other areas it will not (Oil prices being a main area that won’t be affected). Inflation has been rampant in everything and must start to show signs of easing before the market can eventually recover. Some major commodities have begun to ease, such as Copper, Wheat, Lumber, and others, while Oil has retreated from $120 down to around $100 currently. This is good news on inflation. While interest rates have risen modestly, it has caused the bond market and bond funds to be a bad investment with the average bond fund losing -10% this year. Also, it is unlikely that bonds and bond funds will recover in a rising interest rate environment and is best avoided them altogether in my opinion.
Cash and Money Markets have been a good buffer and the only real protection. Stock prices in areas are starting to look attractive. Commodity prices will need to sustainably ease for inflation to moderate before the stock market can fully recover. While there are signs of this happening, it will take some time for it to work thru the economy.
1st Quarter 2022
The stock market sold off in the first quarter with the S&P 500 losing -4.60%. However, the market fell into correction territory (corrections are a loss of between -10% to -20% from a previous peak) during the quarter with the S&P 500 being down -13% at the low on March 14th. Stock market corrections are historically rather common, occurring about once a year, and only last a few months. This is the first correction of the current bull market which started March of 2020. The big question is whether this is the start of a bear market, which is defined as losses of -20% or more from a previous peak, and typically last more than a year.
The Russian-Ukraine war has put pressure on many areas, mostly oil, but other commodity and financial markets as well. Inflation was a problem before the conflict and Crude Oil spiking has now compounded the issue. Inflation is rampant in everything with levels not seen since the 80’s at 7%+. The bond market has been relatively calm comparatively, with interest rates remaining surprisingly low. However, problems are starting to arise in the bond market. Even with interest rates rising modestly in the first quarter, it was enough to create negative returns as the Bond market lost -5.7% in the first quarter. Making matters worse, the yield curve inverted in areas. This is where short term rates are higher than long term rates, and 3-year treasuries yielded 2.65% vs. 10-year treasuries that yielded 2.35% at the end of the quarter. Yield curve inversions don’t happen very often and have preceded the last three bear markets and recessions (occurring in 2000, 2007 and 2020). The reason for the inversion looks to be inflation, but it may not matter. While overall it’s a good thing that long term interest rates are remaining relatively low, the yield curve inversion is cause for concern. All this has rendered the bond market practically uninvestable and best avoided. As I stated previously, I think the bond market is the key to the stock market, and if the bond market continues to deteriorate and affect the stock market, defensive and protective measures will be needed with stock investments.
4th Quarter 2021 review
The stock market finished the fourth quarter with a nice gain. For the year, the total gain for the S&P 500 index was 28.71%. However, the average US stock mutual fund gained 22.50%. Other stock market indexes saw lesser gains also, with the Dow Jones Industrials index up 18.73%, NASDAQ index 21.39%, Small Company’s (Russell 2000 Index) 13.69%, and International Stocks (MSCI EAFE Index) were only up 7.84%. Overall, it’s been an incredible year for the US stock market, and also the last few years with everything that’s happened. Looking forward to next year 2022, the impressive gains in the market have made stock prices in general expensive.
The key to the stock market for the coming year, and years ahead, are interest rates and the bond market. The stock market has sustained these healthy gains in a backdrop of low interest rates. Interest rates have to stay relatively low, or at least rise modestly for the stock market to sustain its growth. If long-term interest rates (10 year treasury bonds) rise rapidly, the stock market will more than likely be damaged. The big question is the pace of how interest rates rise. Inflation generally forces interest rates to rise, however, this time rates have not been effected by inflation so far. If inflation persists in the year ahead, this will more than likely drive interest rates higher, possibly dramatically. Of course there are other risks involved (political, virus, etc.), but interest rates are the main issue in my opinion.
In this scenario, stocks are still favorable and bonds are best avoided entirely (because of the risk of rising interest rates and inflation). Bonds have been performing poorly, losing -1.50% in 2021, and poised to continue going down as interest rates rise. So cash is the only safe alternative. It’s important to understand that anything is possible at any time with the stock market, impressive big gains or a bear market.
The stock market is experiencing a sell-off to start the year, this is due to areas of the market that were pandemic related, and others areas, being overvalued. Stocks with little to no profits that were bid up to lofty levels are seeing a much needed correction (Peloton, GameStop, etc.). While this has bled over to other broader areas (like Technology and the NASDAQ), overall these types of corrections are a good and healthy thing for the market. However, the stock market will be volatile again this year so caution is warranted.
3rd Quarter 2021
The stock market was choppy in the 3rd quarter, but the S&P 500 managed to gain just 0.58%, putting the gain for the year at 15.92%. While the gains this year have been nice, the market still looks dangerously high. Political issues seem to have waned surrounding the new $2 trillion infrastructure bill being negotiated in Congress. However, the big issue is the debt ceiling vote and how it will affect the bond market. Every few years or so, Congress must vote to approve of a debt ceiling increase in order to pay for spending Congress approved in prior spending bills already passed and enacted. It seems arcane, but that’s Congress for you. What should be a routine vote approval sometimes turns into usual political fodder. However, what is dangerous is if the ceiling increase doesn’t get approved the Treasury department could effectively run out of money and technically the US could default on some bonds. While unlikely, that could be financially disastrous. So even the notion that the vote could be close or delayed, or worse voted down, could have dire consequences on the bond market and affect the stock market in turn. Congress recently voted to suspend the ceiling until December so it seems it has been resolved for a few months, although legislative risks still remain. These are the types of events that can come up unexpectedly and can wreak havoc on markets.
The bond market seems to be the key to the stock market. If rates can rise modestly, then stocks should do well. However, if rates rise rapidly, this will undoubtedly cause stocks to struggle. Stocks are at lofty levels based on a number of metrics (Price/Earnings, P/Sales, P/Book Value, etc.), however high valuations can be justified with low interest rates and healthy economic growth (which is what we currently have), and stocks can remain at these levels and advance if rates rise modestly. The key is what pace interest rates rise.
With this backdrop, Financials, Industrials & Material stocks should perform well. Stocks are still the only viable investment option (vs. bonds, others), although remaining risky. However, the market is still long overdue for a correction.
1st Quarter 2021
The stock market advanced in the 1st quarter of 2021, with the S&P 500 index gaining 6.05%. Leading the advance are companies that are integral with the reopening of the economy such as Industrials and travel and leisure stocks. Also, Financial stocks have performed well as interest rates have risen from their pandemic lows. Technology stocks have seen mixed performance as the NASDAQ index has lagged the overall market, gaining only 2.78%. High flying growth stocks last year such as Peloton, Zoom, and Tesla have seen corrections of -41%, -47% and -37% from their recent peaks. Technology stocks were the canary in the coal mine during the pandemic, and this year they are taking a much needed breather as other stocks are catching up in performance. This trend looks to continue thru the year.
However, significant risks remain for the year going forward. As interest rates recover, this has put pressure on higher growth stocks, which has been evident in the NASDAQ index lagging the overall market this year. If interest rates rise significantly, this could start to effect the overall stock market, as economic growth could be crimped. Also, prices on production and consumer goods seem to be rising steadily. Everything from gas, cars, houses, lumber, to groceries and household products seems to be higher. So, inflation is also a threat, and this is a bad combination, and certainly has the potential to have an effect on the stock market. I suspect we’ll have a choppy year going forward in the market as all these things get sorted out. In this environment, it appears Financials, some Industrials, and stocks that were extremely beaten down last year will perform well this year as the economy gets back to fully open.
4th Quarter 2020
The stock market recovery continued in the 4th quarter of 2020. For the full year 2020, the stock market has gained positive returns, and in some areas robustly positive, surprisingly. For 2020, the S&P 500 Equal Weight index gaining 10.47% and the Dow Jones Industrial Index gained 8.98%. With all the trouble that this year has brought to us in our lives, this has been at least a nice consolation. I have certainly been surprised with the markets resiliency. The bear market in early March & April, (where the indexes lost around -35%), seems a distant memory with the market making new highs recently. Remember that the market in 2019 gained 25%, which makes the market recovery even more impressive. Generally, bear market take years to recover, where this latest one recovered in a few months. Moreover, the economic consequences of the coronavirus pandemic were massive, unlike anything that we all have seen in our lifetime. Two similar economic instances of this magnitude were World War II and the Great Depression. If it were not for Congress passing massive and unprecedented relief packages, this country would be in a depression. It’s no coincidence that when Congress passed the CARES Act ($2.2 Trillion, the largest relief package in US history) in late March, that the stock market finally bottomed. That certainly illustrates the importance Congress can have on the economy and markets. There is a general adage in finance that politics doesn’t influence markets in a major way, and while that has generally been the case in recent history, it is absolutely untrue and certainly can, both positively and negatively.
Looking forward to this year 2021, it seems there will still be volatility and a rocky market ahead. The resilient market recovery last year has left many stocks and areas vastly overvalued. Companies that were not affected or benefited by the pandemic have seen their stocks skyrocket. For instance Peloton, the home workout equipment company’s stock gained around 400%; Zoom Video, the online conferencing company’s stock gained 340%; Tesla, the electric car companies stock gained 600%. These stocks currently trade at a Price/Earnings (PE) multiple of around 350, 120, and 220 respectively. For comparison, the average PE for the companies in the S&P 500 index is around 20. There are areas that are seeing rampant speculation also reminiscent to the 1999 .Com bubble such as GameStop. There are many more examples, and valuations are elevated, mostly among growth type stocks. But the good news is other areas of the market seem fairly valued.
I suspect we’ll see a market correction of at some point early this year. There are many headwinds going forward this year. The vaccine distribution is taking longer than should while the virus spread increases. The political changes will affect many industries, and also could affect tax rates on investment gains. Industries that lagged the market in the past year seem poised to catch up this year such as Industrials, Financials, and Consumer Discretionary.
3rd Quarter 2020
The stock market continued to recover during the 3rd quarter, however, on September 2nd the market reached a peak and began selling off that has continued thru the end of September. Technology stocks, which led the market recovery, have led this current selloff also, as most of the biggest and most notable had become somewhat overvalued. Five of the largest Tech companies in the S&P 500 index, Facebook, Apple, Alphabet(Google), Amazon, and Microsoft are up an average 38% this year, which is incredible. Because of the weighting characteristics of the S&P 500 index (larger companies compose a larger weight in the index), these five companies (just 1% of the total 500 companies), comprise around 17% of the total weight of the index. In the investment industry this is called market breadth. Because of the outperformance of these few large Tech companies, overall market breadth has been very weak, as stocks in other industries and smaller companies overall, have lagged considerably. Weak market breadth is not a good sign of a healthy market advance or recovery. Consequently, the performance of the S&P 500 equally weighting all 500 companies is down around -5% this year, which is a remarkable difference. It’s certainly understandable why large Tech companies have performed well in this environment as these companies have been least effected by the economics surrounding the pandemic. Looking ahead, as the economy continues to recover, I expect other industries will start to catch up in performance.
I’m still very cautious as we enter the last quarter of the year with the election looming. Last year the market gained around 25%, and during the first half of this year 2020, the market wiped out all those gains, then has almost rallied all the way back. There are many obstacles still to overcome with the economy and we are not “out of the woods” yet. Congress has stalled in considering another round of stimulus, and with unemployment benefits running low, and unemployment recovery slowing, this could stall the economy. Also, obviously the political situation will more than likely cause market volatility. The president contracting coronavirus certainly has an effect, and could have political and market implications if he gets worse, hopefully he will be ok. For the election, I like to observe the betting odds as a predictor more so than the national polls as they have been more accurate historically, although they are not always correct. A few months ago the betting odds heavily favored Biden to win, however, the odds have tightened up considerably, but still favor Biden slightly. The markets don’t like uncertainty, and this election is that, and will likely cause market volatility as it approaches.
2nd Quarter 2020 review
The market has made an amazing recovery from the bear market lows on March 23rd. During the bear market, the S&P 500 fell -34% and took a little over a month to do so (from February 19th peak). That is one of the fastest top to bottom bear markets on record. Consequently, the ensuing recovery rally was one of the fastest also, as the S&P 500 lifted out of bear market territory just 12 trading days after the low on March 23rd, and a month later had recovered half of its losses. As of end of the Quarter (June 30th), the S&P 500 is down just –3.08% for the year. As the coronavirus ran its course (particularly in New York City) and the ensuing economic shutdown and reopening, the market recovered quickly. The economic ramifications are still being sorted out and are unclear, and company’s financial impacts are likewise unclear. However, it is clear which industries were effected more than others. Leading the recovery was Technology, for good reason, as those businesses were the least effected and some actually benefited in the stay at home/shutdown environment. Tech companies (Google and Facebook in particular) have some of the best growth rates in the entire stock market among large stocks. It’s no surprise these very large, dominant Tech companies led the recovery out of the bear market. As for other industries during the crisis, they are a distant second place to Tech, both in performance and fundamentally, for good reason. The other companies I have focused on in other industries outside of Tech all have big dividend yields and while some will take time to recover, all should provide good income thru dividends going forward. The average yield on these big dividend paying stocks is over 5%.
The most devastated industries are cruiselines and airlines. Even airlines with the government bailouts will struggle, as they may be permanently damaged. Recall after 09/11 the government bailed out the airlines, to no avail, as all but one went bankrupt. The current situation is actually worse than 09/11 for airlines.
Looking forward to the rest of the year, I suspect the markets will be choppy and volatile as this crisis still isn’t over. As I write this, the coronavirus is resurging in many areas of the country. Things won’t get back to normal until a vaccine is fully developed, but that may be sooner than anticipated, possibly before the election. However, some things I believe will be permanently changed, such as more teleconferencing and less travel. Also, toward the end of the year we have the election. I do believe this will leave a “cap” on the market for a while as all the damage is assessed and the economy tries to get back to some sort of normalcy. While Trump is lagging in the early polls for the election, another metric I follow for elections is heavily favoring Biden (much more than the early polls indicate). It doesn’t seem the market has taken this fully into account yet, and that will probably cause some market volatility if this persists as the election approaches.
1st Quarter 2020 review
All of this is hard to believe. Hard to believe that just 6 short weeks ago the market was trading at all-time highs. Just three weeks ago I was watching my youngest son in a school play in a packed auditorium. It’s hard to believe the speed at which things simply stopped, and our lives changed. This coronavirus pandemic has been shocking in the speed at which it has taken hold. I’m not going to dwell on the bad news as you are already aware. As for the markets, they are down significantly as I’m sure you are also aware.
However, there are silver linings in all of this, which I would rather focus on. This coronavirus pandemic will pass, and the high rate of contagion of this virus theoretically will cause it to pass rather quickly, although it doesn’t seem so day to day. The economy and the market will snap back strong once this passes. During the market run-up before this crisis, I hadn’t bought a stock in over a year, because of many company overvaluations, and it seemed the market had gotten ahead of itself last year. Your account had a good cash buffer as this got started, and when the downturn began, I sold a significant portion of Apple at good prices. Apple had a great run over the last few years and had appeared to have gotten ahead of itself also. Apple is still a great company, but they, nor any company, is immune to this type of economic calamity. The market finished the quarter down big, with the Dow Jones Industrial Average index down -22.73% into a bear market.
In general, I have been rather conservative when it comes to investment especially in the last year or so, as this long bull market ended, and relatively, I think it is now proving beneficial. While the economic and market impact of this coronavirus pandemic is certainly significant, (we are definitely in a recession and bear market), there are silver linings. This is obviously a health crisis, and while the President has taken extraordinary steps to combat the spread of the virus, there is little they (Government) can do to cure the virus. That’s up to the medical field. The good news is that while COVID-19 is highly contagious and dangerous, this isn’t the first time this has happened medically (Ebola, SARS, MERS, H1N1, ect.), and the industry will find a solution. There are therapies and vaccines that look promising, but a vaccine could be months away at the earliest, therapies look encouraging and are being implemented. The FED and Congresses actions with relief legislation will help buffer the economic damage but won’t solve the problem. Once this virus runs its course, which hopefully will only take weeks or a month or two, everything should get back to normal quickly. The stock market will come back before the economy, as it is a forward looking mechanism, and it will only take a glimmer of good news that the worst is over, to put the bottom in the market and start the stock market recovery. The technology industry, I believe will be a beneficial industry in all this as people become less concentrated and begin working remotely.