April 2024 Investment Commentary |
|
The stock market rewarded investors in 2023 when the S&P 500 rose 23%, sixty percent of which was driven by just seven stocks known as the “Magnificent 7” (Amazon, Microsoft, Meta, Tesla, Google, Apple, and Nvidia). So far, 2024 seems to be continuing the trend. The stock market has already achieved a staggering 22 new all-time highs within the first four months of the year. For context, the stock market had only reached one new all-time high in 2022 and 2023 combined. (1)
The market’s rapid rise, largely on the backs of a few companies, has left many investors wondering if this is the time to reduce their investments due to the fear that there may be a near-term correction. Fortunately, history provides us with some solace when faced with such trepidation. Looking back to 1970, individuals who invested when the S&P 500 achieved an all-time high actually did better over the next three years compared to the performance achieved by individuals who invested on any other day (10.53% vs 8.85%). (1)
While this counterintuitive finding does indicate that a new market high is not something to be feared, it should not lead us to assume that we do not need to be discerning in how we allocate our hard-earned money. Below, we have highlighted three specific topics that we believe may be helpful as we move forward through the rest of this year:
-
Diversify Away from Leaders: The ten largest US companies, which include all but one of the “Magnificent 7” stocks, now represent an astounding 34.6% of the stock market. (2) For perspective, these 10 companies are now worth more than every company in the S&P 500’s real estate, materials, energy, consumer staples, and industrials sectors combined. (3) Much of this overconcentration has resulted from the excitement over the very real and transformative power of the artificial intelligence revolution, which most of the 10 largest companies are seemingly well-positioned for. The impact of AI is already being felt, as shown in a recent survey of large and small business CFOs, in which 51.1% of respondents reported that their companies recently implemented automated tasks previously done by employees. (4)
-
Take Away: While AI will be hugely transformative on society, that does not necessarily mean investors should continue to blindly add exposure to the top 10 largest companies just because they have been some of the best-performing stocks recently. In fact, being among the top 10 largest companies does not typically bode well for future returns. Companies that have achieved this ranked status in the past have underperformed the overall market on a 1, 3, and 5-year basis as competition from other growing companies intensified. (5) This is one reason why none of the top 10 largest companies in 1990 were still in the top 10 ranking by 2020. (6) Technologies and societies change over time, but our focus on keeping a diversified portfolio should not.
-
Review Your Cash Holdings: Even though interest rates (the federal funds rate) remain above 5%, 34% of savers are still earning less than 1% on their money (primarily sitting in their bank accounts). (7) With economic data still looking strong, real wages growing around 4.5%, and the stock market achieving all-time highs, we believe it is unlikely that the Federal Reserve will drop interest rates quickly.
-
Take Away #1: If interest rates remain higher for longer, it will become even more important that individuals ensure they are earning a reasonable return on their savings without increasing their risk significantly.
-
Take Away #2: It is equally important that investors do not fall into the trap of moving excess funds that would have otherwise been invested in the stock market into cash just because interest rates remain high. Someone who put $100K into cash 30 years ago would have the equivalent of $47,500 in purchasing power today, adjusted for inflation. This compares to $155,200 for someone who invested in bonds and $866,000 for the person who invested in the stock market. (8) While past performance is not indicative of future performance, history has a way of warning us against shifting our long-term strategy in response to shorter-term changes in interest rates.
-
Expect Increased Volatility: While most media attention has been focused on the upcoming US presidential election, it is important to remember that more than 74 other countries have elections in 2024. This means roughly 60% of the world’s population will be heading to the polls this year. When you combine the potential disruptions that can result from any unexpected political outcome with the existing geopolitical conflicts already raging in Ukraine, Gaza, and Sudan, it is reasonable to expect increased market volatility moving forward.
-
Take Away #1: A correction of 10% or more occurs more frequently than most people expect… on average every 1.9 years. (9) Given that March marked the fifth consecutive month with a gain of 1% or more, we would fully expect a correction going forward.
-
Take Away #2: As a recent report by Bespoke Research points out, “Casinos make money by making sure bettors eventually lose more often than they win. The stock market is the opposite. The longer you play, the better your odds. Historically, the odds of the S&P 500 being up over any one-month time frame have been 63%. Over a year, the odds of a gain jump to 75%, and over eight years, they surge to 97%.” (10) As educated investors, our job is to plan for volatility with the understanding that if we stick to our long-term strategy, we are likely to be rewarded.
|
|
|
Wishing you all a very healthy and happy Spring season,
The Michel Team
Susan, Rob & Carol Ann
Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, an SEC Registered Investment Advisor; Glen Eagle Wealth, LLC, Member FINRA & SIPC. The information presented is believed to be factual and up to date, but we do not guarantee its accuracy and is subject to change without notice. Commentary is for informational purposes only and is not meant to be investment advice or a recommendation of securities to any individual. It is not prepared with respect to the specific objectives, financial situation, or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed in this commentary.
1. The Irrelevant Investor – “Don’t Be Afraid” 2. JPMorgan – “Guide to the Market 2Q24” 3. S&P Dow Jones Index – “Quick Facts” 4. Duke University, Richmond Fed 5. Goldman Sachs “Chart of the Week: Nothing Lasts Forever” 6. Top Foreign Stocks – “The Largest 10 US Stocks at the Start of Each Decade: Chart” 7. Bankrate 8. BlackRock “Student of the Market February” 9. Money Crashers “Stock Market Corrections Investor Facts” 10. Bespoke – Get Invested
|
|
Please feel free to share this newsletter with your network! |
|
|
|
|
|
|
