Market Update for December 11, 2023
The S&P 500 is now up over 12% since the quarterly low October 27, 2023, 7.65% for Q4-to-date, and over 21% for the year-to-date. Stocks have performed well off that late-October-low under the auspices that the Federal Reserve is done raising the overnight lending rate, and market rates have jagged down in sympathy. Economic data has recently been read by the markets as neither too hot nor too cool, but like Goldilocks and the Three Bears, “just right.” While we never know what lies around the next bend, the broad stock market feels pretty good right now, especially with the calendar still in the middle of a historically bullish period for another several weeks.
There are persistent concerns about the narrowness of the rally in stocks, which is to repeat from previous blog posts that the very largest stocks are all within the tech sector, and that the average stock has not performed nearly as well as the S&P 500 itself, as the index is weighted heavily by its biggest constituents. In fact, the difference in relative performance between tech stocks and value-leaning or dividend-paying stocks is historically large. I intend to continue to keep client monies in both camps, but do not anticipate a substantial change where value might begin outperforming until at least January 2024. Virtually every trade I have made for client portfolios in the past several quarters has been to warm up to technology stocks more and more, but I have not abandoned value-stocks entirely, as leadership will inevitably switch again. International and emerging market stocks continue to be less attractive than domestic shares. The price of gold is up 9.39% since the Hamas/Israeli war began in early October, but only 9.43% for the year-to-date- it was essentially flat before that event. Gold trades today about where it traded Labor Day of 2011- as a potential investment it rarely interests me, and that includes today.
The major change in my investment thinking is that domestic small-cap stocks look more appealing than they have in some time. Small-cap stocks are roughly defined as companies that trade publicly on a major stock exchange worth around $1 billion to around $5 billion. Well below a billion dollars would be considered “micro-cap” and from $5B to around $15B would be considered mid-cap stocks. Most of the companies we know the names of, including almost the entire S&P 500 index, have market capitalizations above $15 Billion and are considered large-caps. These numbers are not hard and fast, but this gives you a sense of how these sized stocks are tiered. Small-cap companies generally need to borrow more money than do large-cap companies, so the market consensus that the Federal Reserve is likely done raising rates for the coming period- and may even lower rates sometime in 2024- is music to the ears of small-cap companies who have been either postponing investment or paying higher interest rates to fund their projects.
The small-cap index Russell 2000 has increased 14.90% since same referenced lows of October 27th, and again in searching out areas of potential outperformance going forward, I am interested in this space. For actively managed monies under our FFMS platform I submitted trades in early December to increase small-cap exposure across the board, and I will be reaching out to clients proactively suggesting some increased exposure there over the coming weeks. This is not a “forever” call, but it should persist for the next few quarters, as these trends often do.
We are amid the busy holiday season. I find myself frequently reflecting on what has been a very good year for me and my clients, and I am happy to report good health for my staff and their immediate families. Sandy has nicely decorated our lobby for the season in a more subtle homage to the “Chuck decoration" days of yore. On behalf of all of us at First Financial, Merry Christmas, Happy Hanukkah, have great holidays and a happy New Year!