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Equity Market
Year-to-date, the equity market, as measured by the S&P 500 Index, returned 16.9% through June 30, 2023. While that is impressive, a preponderance of that return is due to the performance of a small number of the more largely capitalized stocks in the index. They used to be called FAANG (Facebook, Apple, Amazon, Netflix, and Google) and recently Microsoft and Tesla have been added to the list. One portfolio manager here dubbed them “MT. FAANG.” In addition, some are proposing (unofficially of course) that Nvidia, which recently broached one trillion dollars in market capitalization, be added to the list.SourceMoneyGuru-https://www.mgkx.com/4973.html
Since the S&P Index is market cap-weighted, these mega cap stocks have a large impact due to both stellar returns and heavy weight. We know of no non-index replicating portfolio manager (read: active) that constructs a portfolio based on market capitalization. Rather, they typically size holdings based on conviction levels and generally are more or less equally weighted. Therefore, we feel a better benchmark is the S&P 500 Equal Weight Index. The performance gap between the two indices recently has been stark, echoing the late 1990s, when you were almost assured underperformance if you did not own the handful of market-leading stocks. For the three years from 1997-1999, the S&P 500 returned a whopping 107.6% un-annualized while the S&P Equal Weight returned a more modest 62.2% – still impressive but about half the cap-weighted version. While the divergence year-to-date is large, looking back three years, the equal weighted index has in fact slightly outperformed.SourceMoneyGuru-https://www.mgkx.com/4973.html
High Yield Market
The high yield market has also been relatively strong, with the HYG ETF returning 13.2% year-to-date. This is in line with historical averages, and we believe that the high yield market remains attractive, especially in light of the recent sell-off in the equity market.SourceMoneyGuru-https://www.mgkx.com/4973.html
Inflation
Inflation has been a major concern for investors in recent months, but there are signs that it may be starting to ease. The Consumer Price Index (CPI) rose 8.6% in May, but this was the highest reading in over 40 years. However, the core CPI, which excludes food and energy, rose 6.0% in May, which was the lowest reading since November 2021. This suggests that inflation may be starting to peak.SourceMoneyGuru-https://www.mgkx.com/4973.html
Fed Policy
The Fed has been raising interest rates in an effort to combat inflation, but it is unclear how many more rate hikes are in the cards. The Fed has signaled that it is likely to raise rates by 0.75% in July, but it is unclear whether it will continue to raise rates at this pace in the coming months.SourceMoneyGuru-https://www.mgkx.com/4973.html
Overall Outlook
Overall, we believe that the market is still relatively attractive, especially in light of the recent sell-off. We continue to favor high yield bonds, as we believe that they offer attractive yields and downside protection. We also believe that the equity market remains attractive, but we would recommend a more cautious approach, given the recent volatility.SourceMoneyGuru-https://www.mgkx.com/4973.html
Conclusion
The third quarter of 2023 is likely to be a challenging one for investors, but we believe that there are still opportunities to be found. We will continue to monitor the markets closely and adjust our portfolios as needed.SourceMoneyGuru-https://www.mgkx.com/4973.html SourceMoneyGuru-https://www.mgkx.com/4973.html
