January 2024 Market Update

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In my updates, I usually find an investment theme that I want to present to you and then attempt to write about it in an educational and fun way.  Given that the internet and cable TV are chock-full of financial reporting these days, there is better use for your time and mine than just repeating the same stories.  However, a few different ideas have been percolating (think old-fashioned coffee pot) in my mind over the past several months, so I am going to briefly cover several of them rather than taking a deeper dive into one topic.

Where’s my 26%?

Hard to believe, but the S&P 500 Index finished the year up 26%.  Amidst war, inflation and recession concerns, the S&P 500 ripped (new buzzword on CNBC) higher by 26%.  How come I don’t feel 26% wealthier?  Unfortunately, the index does not represent the average stock (more on that later) as it was dominated last year by the “magnificent seven,” the name given to the seven largest technology stocks that make up 28% of the index.  Think about that, seven stocks make up 28% of the size of the S&P 500 Index and the other 493 stocks are only 72% of the index.  Those seven stocks made up 59% of the return of the index, according to Morningstar.  That means that the 493 stocks, minus the magnificent seven, were only up 10.7%!  The good news is that either through mutual funds or individual stocks, you owned some of the magnificent seven.  However, no one except the indexes owned all seven in the oversized portion they have become.  Being diversified, a wise decision normally, did not help performance in 2023.  It’s hard for me to think that the lopsided performance that happened in 2023 could happen again, but I’m not confident forecasting it will not. The predominate investment theme now is the development of AI (Artificial Intelligence).  This bias could drive most of the magnificent seven even higher in the short term.  We remain convinced that diversified investing is the way to build more consistent, less volatile long-term wealth.  For the year, value stocks (Russell 1000 Value Index) were up 11.5%, international stocks (EAFE Index) were up 15.0%, small-cap stocks (Russell 2000 Index) were up 16.9% and, despite the Fed’s rate hikes, bonds (Bloomberg US Agg Index) were up 5.5%.  A good year for all, just not 26%.  

Is the S&P 500 the right index to measure?

When I started in the investment business in 1986, we spent a lot of time educating clients that the S&P 500 was the stock index to measure, not the 100-year-old Dow Jones Industrial Average Index that was reported on the news every night.  Without getting into the financial “weeds,” the Dow is made up of only 30 stocks and the S&P 500 is, well, 500 stocks (generally, more companies mean a better representation of the economy).  Plus, the Dow has an unusual mechanism where it is dollar-weighted.  So, the price movement in a stock worth $200 per share has a bigger impact than the movement of a stock worth $2 per share.  Thus, the percentage gain or loss in the stocks is less relevant than price movement.  The S&P 500 was and is size-weighted.  So, a large company’s performance has greater impact than that of a smaller company on index performance.  Back in the eighties, the biggest stocks in the S&P 500 Index were names like GE, Exxon, Philip Morris, Coke, etc.  The top seven names back then would have been less than 10% of the index versus the 28% of the index currently (see above).  Has the S&P 500 of today become so lopsided that it is behaving more like the Dow I was arguing against in the eighties?  I’m not sure, but it is something our investment committee at BFA and I are giving a lot of thought.  There are alternatives like the equal-weighted S&P (treats all 500 stocks as if similar in size) that are probably a better representation of the US economy.  For 2023, the S&P 500 Index was up 26%, while the S&P 500 Equal-Weight Index was up 13.8%.  Is that the better measurement of the entire economy?  Or is it another broader index?  If we decide on a better benchmark, we will let you know, but remember the S&P 500 Index of today is dominated as never before by a handful of mega-stocks.

RELATED: Listen to Mike Kauffelt interviewed on the WJAS GD Morning Show!

What will happen in the election year 2024?

Lots of stock market data indicate that presidential election years are usually good for the stock market.  However, statistics can be deceiving.  Most years are good for the stock market.  However, this election looks to be like no other in my lifetime.  To diffuse some of the tension of even discussing politics, let me reference my dad.  He is 82 years old and mentally very sharp.  I love my dad and he is a hero to me.  He is 100% online banking and has good cyber skills.  He does a tremendous job of taking care of his wife (my mom) of 62 years who is suffering from Alzheimer’s.  As much as I love and admire my dad, I would not vote for my dad for president of the United States.  I do not think that he could, even with great staff, run the most complex country in the world for four years (24/7) at his age.  I turned 18 in 1980.  That was the first presidential election in which I could have voted.  As a lazy young man preoccupied with college, cars and girls (not in that order), I did not do my civic duty and I did not vote in that election.  That was the year the American people elected the oldest president ever (then) Ronald Reagan.  He was 69 years old when he was elected, a spring chicken compared to the two front runners for the office right now.  I know 60 is the new 50, and 70 is the new 60, etc., but should we have an age limit on who can run for President?  Assuming a person might get two terms, should there be an age cutoff of 70 to be elected?  I don’t know, but early polling indicates many voters are feeling the same way I do.  The good news is that stock markets go up most of the time and they do not care as much about who is president versus policy.  The stock market, right or wrong, is based on capitalism and business.  Most elections do not impact or change the unique thing that sets America apart from the rest of the world: incredible business innovation.  Yet, I cannot help but feel this election is going to be a great spectacle to watch and will probably create a more volatile presidential election cycle for the stock market than in the past.

My forecast and $5 will get you a coffee at Starbucks.

Finally, 2023 was another great example of my firm belief in the folly of forecasting or market timing based on forecasts.  Last year, almost every economist forecasted a recession based on the aggressive Fed rate hikes of 2022.  Some called for it early in the year and some thought it would hit later in 2023.  Some predicted hard landings and some predicted soft landings.  Guess what NO ONE predicted?  There would be no recession and the stock market, as measured by the S&P 500, would increase 26% for the year.  Unemployment remains historically very low.  Inflation is cooling and corporate profits continue to be sufficient to fuel hopes for economic good fortune.  After the markets cratered in 2022, the worst year ever for bonds and a very bad year for stocks, it could have been very tempting to ride out 2023 in cash, particularly since money markets were finally paying a respectable yield.  However, had you done that, you would have missed out on a great year in the financial markets where a balanced portfolio of stock and bonds did two to three times better than a money market account over the full year of 2023.  Don’t worry about the election.  Don’t worry about the consensus forecast.  Don’t worry about the index.  Stay invested, stay diversified and enjoy the benefits that accrue in most years to that prudent philosophy.

Mike Kauffelt

Co-CIO, Bill Few Associates, Inc.

Data Sources:  Bloomberg, Factset, Morningstar and The Wall Street Journal

Contact Michael K. Kauffelt, II, CFA

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