We’re only 5 months into 2023 but if I had to summarize this year, so far, it would be the year of disconnects.
Let’s start with the economy. April economic data continued to show signs of slowing. Consumer spending makes up 70% of GDP and has been abnormally high the past couple years but declined sharply in April. The financial planner in me found some good news in that though: personal savings finally normalized after many quarters of declining savings rates. (So, here’s a question: Is the American consumer batting down the hatches in preparation for recession or simply running out of free COVID stimulus?) Trucking / Freight (a leading indicator) has pulled back sharply. We continue to see goods prices coming down, but services remain stickier. The labor market is just now starting to see some cracks, albeit coming from an extremely strong level. Nonetheless, unemployment remains at a multi-decade low around 3.5%.
That said, the markets continued to climb higher for April. We’re currently in earnings season. At the time of this writing, well over half of the companies in the S&P 500 having reported. As we’ve seen over the past several quarters, companies continue to exceed earnings expectations. In fact, 80% have beat earnings estimates. That’s a big deal for the markets since profits and earnings are what drive the markets long term.
Communication & Tech sectors lead the markets so far this year, both up in the mid +20% while Financials, Energy & Utilities all negative in the single digits. It should be no surprise the biggest decliner is the Regional Bank Index, down -34% YTD.
If the market feels disconnected to you, you’re not alone. While technically the indexes are indeed up, if you own a diversified portfolio of stocks, you may feel left behind when looking at your actual performance. Well, it doesn’t take much digging to see where the disconnect is. Year to date, the average performance of the top 8 (mostly tech) names is +43% but the remaining 3,000 stocks have averaged a -1% return YTD. (Let that sink in for a moment). To illustrate, here’s the FAAMG mega-stocks compared to a random sampling of companies* to show just how narrow the gains have been thus far:
To compound the disconnect, those five FAAMG names account for over 21% weighting in the S&P 500 with Apple & Microsoft taking up a whopping 13% combined! This phenomenon, while something investors should at least be aware of, isn’t anything new. Do you know what the biggest stock was in 1932? AT&T, which was 13% of the market by itself! General Motors once represented 8% of the market in 1928. (Sidenote: When asked about investing in the newfound automobile craze in 1903, the President of the Michigan Savings Bank at the time allegedly said, “The horse is here to stay, but the automobile is only a novelty—a fad.” That quote didn’t age well.)
While we’re talking about disconnects, the stock market is clearly at odds with the bond market. In some ways, stocks don’t appear to see recession on the horizon while the bond market is certainly screaming recession with an extremely inverted yield curve. (Short term rates are significantly higher than long term rates). Stocks have priced in one more Fed rate hike for the beginning of May and then 3 rate CUTS by year-end. That feels overly optimistic to us. Right or wrong, the Fed got blamed for the inflation crisis by holding rates at 0% for too long post-COVID. My money says they won’t be so quick to lower rates in fear of inflation climbing back up should they begin to cut prematurely.
We’ve said before that we are not currently in a recession but a mild one is probably on the way. Many smart economist, Raymond James included, have been calling for a recession to begin 3rd quarter this year. Our recent GDP came in at 1.1% for 1st quarter, less than half of what it was 4th quarter of last year. If that trend continues, those forecasts for negative GDP the latter half of this year could be spot-on.
The markets have been stuck for 6 months now in a trading range it can’t seem to break from. We may see more sideways trading for some time until we officially see a rate cut. If history is any lesson here, the patient investor will ultimately be rewarded when things eventually rebound.
Here's your Useless Fact of the Month:
You’ve probably heard of the old market adages like the Santa Claus rally, the January effect, or the October surprise. There’s another one: Sell in May & Go Away. The saying goes to sell your stocks in May and don’t come back until November. There actually is a bit of data to support that. The 6 months period of May – October has averaged an unimpressive 2% return while the 6 months from November – April have averaged 6.7%. Obviously, we can point to numerous years that didn’t pan out at all, but I’d be remiss if I didn’t add that Americans will also consume over 14 million gallons of Tequila on Cinco de Mayo. Are these two events connected? Who knows!
Lastly, John & I want to wish all the moms out there a very happy Mother’s Day!
As always, thank you for being a client,
Sean & John
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