Large US stocks continue to decimate the competition. For all the thought and effort expended in the pursuit of the “optimal” investment portfolio, simply owning an S&P 500 ETF continues to make fools of most investment professionals (including myself). Small US stocks lost over 4% during the quarter, which resulted in an 8+% under-performance relative to large US stocks over that period. International stocks and bonds were basically flat.
Does this mean that I think investors should give up on owning international stocks, “tilting” towards small/value stocks, or even owning bonds? Not a chance. Owning a diversified portfolio means that some investments will do better than others, especially over short periods of time, but often even for painfully long periods of time.
I’m sure all of that is cold comfort to investors in small, value, or international stocks. By all measures, those folks would have been better off – by a large margin – simply holding the S&P 500 for the past 10-15 years. The important thing to remember is that investing is a long-term game, and every investor much choose an investment strategy that they can feel comfortable sticking with for 30+ years. If that means only owning the S&P 500, then so be it. However, given the amazing out-performance of large US stocks relative to both small/value and international stocks over the past 15 years, it’ll be interesting to see if that persists going forward, or not.
Overall, the market continues to do well. 2024 has also been a relatively calm year in the markets. Volatility – as measured by the CBOE Volatility Index (VIX) – has reached very low levels. Unfortunately, we can’t expect volatility to remain subdued forever, but it’s nice to get a break from doom-and-gloom every once in a while.
A quick note about market concentration
One concern that many investors have right now is the relatively high level of concentration in the stock market. That is, the recent performance of the stock market has been driven by only a few companies (think Amazon, NVIDIA, Meta/Facebook, Google, Microsoft, etc.). Put another way, this market rally is narrow, not broad.
As an illustration, take a look at the table below. It lists the top 10 companies in the Vanguard S&P 500 ETF (VOO). These 10 companies account for over 35% of the total value of the fund!
While certainly not ideal, it’s actually not unprecedented for the stock market to become so concentrated. During the 1950s, the 10 biggest companies often exceeded 30% of the total value of the market.
And if you ask Warren Buffett, he’ll tell you that the vast majority of an investor’s gains will often come from just a few companies/investments. Buffett has made thousands of investment decisions over the years, but the “big money” can be traced to perhaps 5-8 prudent choices.
That’s also the dynamic you see in areas like venture capital. VC funds invest in startup companies that have good prospects for growth, but also a high potential for going bankrupt. Look at any VC portfolio and they may have perhaps 100 investments, but almost all of the gains come from the top 5-10%. Many of the rest become worthless.
The lesson here is that current level of concentration within an index isn’t as scary as it sounds. And there are easy ways to remedy the concentration risk of the S&P 500, such as owning small/value or international stocks.
Economic Update
Generally, it’s smooth sailing right now on the economic front. Here are the main highlights to keep in mind:
Real GDP growth remains within the normal range
Inflation remains under wraps, but still slightly elevated
Commodity and energy prices remain stable
Unemployment has ticked up slightly so far this year
Global geopolitical developments and the US presidential election season could could introduce additional volatility to markets
Interest rates
When it comes to interest rates, the leaders at the Fed have indicated that they are hesitant about cutting rates too soon, as they feel that the fight against inflation isn’t quite over. The latest version of the Fed’s “dot plot” – which provides quasi-official projections from Fed leaders – indicates only a single 0.25% cut in 2024. I use “quasi-official” only in the sense that Fed leaders can change their minds at any time, so it’s important to take the dot plot with a grain of salt.
The dot plot data contrasts with the bond market, which is projecting two cuts in 2024. And there are indications that certain players in the bond option market are betting on 3%+ of rate cuts in the near term, which would be a huge change to current policy.
For what it’s worth – which isn’t much – my view is that the Fed should endeavor to keep interest rates in a “normal” range for as long as possible. Interest rates play a vital function when it comes to pricing risk and efficiently allocating capital within our economic system. The last thing we want in our economy is a bunch of “zombie” businesses that rely heavily on cheap (or even free) money to succeed. Better to let them fail and get replaced by better quality businesses over time.
Normalized interest rates also offer the Fed some room to lower rates in response to a future recession. If rates are lowered prematurely, then the Fed will likely have to resort to other strategies such as buying Treasury bonds or mortgage-backed securities, which offer additional complications and risks.
AI concerns
Developments in Artificial Intelligence (AI) have offered tremendous support to the stock market over the past 12 months. Companies of all stripes have raced to embrace AI tools in the hope of boosting productivity and reducing costs.
And while the long-term ramifications of AI technology remain to be seen, we are certainly already seeing some early effects in the labor markets. Many creatives such as copy writers or freelance artists have lost jobs to AI tools, and if AI development continues apace, the labor markets could go through significant disruption over the next 5-10 years. My opinion is that very few jobs are completely safe from AI-based competition, so all investors should keep an eye on how the adoption of AI tools affects the labor markets going forward.
Other updates
FINCEN beneficial owner reporting… a federal court held that the Corporate Transparency Act (CTA) is unconstitutional (link). As a result, some small business owners may not need to report under FINCEN’s new BOI rules. It’s really easy to register (I’ve already done so), but if you would rather not, then I advise checking with your attorney to see if this court decision might relieve you of the obligation.
8 facts on RMDs… here is a good article from Morningstar that provides a refresher on some of the details around required minimum distributions.
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Market Commentary 2Q 2024
Market Update
Large US stocks continue to decimate the competition. For all the thought and effort expended in the pursuit of the “optimal” investment portfolio, simply owning an S&P 500 ETF continues to make fools of most investment professionals (including myself). Small US stocks lost over 4% during the quarter, which resulted in an 8+% under-performance relative to large US stocks over that period. International stocks and bonds were basically flat.
Does this mean that I think investors should give up on owning international stocks, “tilting” towards small/value stocks, or even owning bonds? Not a chance. Owning a diversified portfolio means that some investments will do better than others, especially over short periods of time, but often even for painfully long periods of time.
I’m sure all of that is cold comfort to investors in small, value, or international stocks. By all measures, those folks would have been better off – by a large margin – simply holding the S&P 500 for the past 10-15 years. The important thing to remember is that investing is a long-term game, and every investor much choose an investment strategy that they can feel comfortable sticking with for 30+ years. If that means only owning the S&P 500, then so be it. However, given the amazing out-performance of large US stocks relative to both small/value and international stocks over the past 15 years, it’ll be interesting to see if that persists going forward, or not.
Overall, the market continues to do well. 2024 has also been a relatively calm year in the markets. Volatility – as measured by the CBOE Volatility Index (VIX) – has reached very low levels. Unfortunately, we can’t expect volatility to remain subdued forever, but it’s nice to get a break from doom-and-gloom every once in a while.
A quick note about market concentration
One concern that many investors have right now is the relatively high level of concentration in the stock market. That is, the recent performance of the stock market has been driven by only a few companies (think Amazon, NVIDIA, Meta/Facebook, Google, Microsoft, etc.). Put another way, this market rally is narrow, not broad.
As an illustration, take a look at the table below. It lists the top 10 companies in the Vanguard S&P 500 ETF (VOO). These 10 companies account for over 35% of the total value of the fund!
While certainly not ideal, it’s actually not unprecedented for the stock market to become so concentrated. During the 1950s, the 10 biggest companies often exceeded 30% of the total value of the market.
And if you ask Warren Buffett, he’ll tell you that the vast majority of an investor’s gains will often come from just a few companies/investments. Buffett has made thousands of investment decisions over the years, but the “big money” can be traced to perhaps 5-8 prudent choices.
That’s also the dynamic you see in areas like venture capital. VC funds invest in startup companies that have good prospects for growth, but also a high potential for going bankrupt. Look at any VC portfolio and they may have perhaps 100 investments, but almost all of the gains come from the top 5-10%. Many of the rest become worthless.
The lesson here is that current level of concentration within an index isn’t as scary as it sounds. And there are easy ways to remedy the concentration risk of the S&P 500, such as owning small/value or international stocks.
Economic Update
Generally, it’s smooth sailing right now on the economic front. Here are the main highlights to keep in mind:
Interest rates
When it comes to interest rates, the leaders at the Fed have indicated that they are hesitant about cutting rates too soon, as they feel that the fight against inflation isn’t quite over. The latest version of the Fed’s “dot plot” – which provides quasi-official projections from Fed leaders – indicates only a single 0.25% cut in 2024. I use “quasi-official” only in the sense that Fed leaders can change their minds at any time, so it’s important to take the dot plot with a grain of salt.
The dot plot data contrasts with the bond market, which is projecting two cuts in 2024. And there are indications that certain players in the bond option market are betting on 3%+ of rate cuts in the near term, which would be a huge change to current policy.
For what it’s worth – which isn’t much – my view is that the Fed should endeavor to keep interest rates in a “normal” range for as long as possible. Interest rates play a vital function when it comes to pricing risk and efficiently allocating capital within our economic system. The last thing we want in our economy is a bunch of “zombie” businesses that rely heavily on cheap (or even free) money to succeed. Better to let them fail and get replaced by better quality businesses over time.
Normalized interest rates also offer the Fed some room to lower rates in response to a future recession. If rates are lowered prematurely, then the Fed will likely have to resort to other strategies such as buying Treasury bonds or mortgage-backed securities, which offer additional complications and risks.
AI concerns
Developments in Artificial Intelligence (AI) have offered tremendous support to the stock market over the past 12 months. Companies of all stripes have raced to embrace AI tools in the hope of boosting productivity and reducing costs.
And while the long-term ramifications of AI technology remain to be seen, we are certainly already seeing some early effects in the labor markets. Many creatives such as copy writers or freelance artists have lost jobs to AI tools, and if AI development continues apace, the labor markets could go through significant disruption over the next 5-10 years. My opinion is that very few jobs are completely safe from AI-based competition, so all investors should keep an eye on how the adoption of AI tools affects the labor markets going forward.
Other updates
FINCEN beneficial owner reporting… a federal court held that the Corporate Transparency Act (CTA) is unconstitutional (link). As a result, some small business owners may not need to report under FINCEN’s new BOI rules. It’s really easy to register (I’ve already done so), but if you would rather not, then I advise checking with your attorney to see if this court decision might relieve you of the obligation.
8 facts on RMDs… here is a good article from Morningstar that provides a refresher on some of the details around required minimum distributions.
Matthew P. Jenkins, CFA, CFP®
Matthew Jenkins is the Founder of Noble Hill Planning LLC. Matthew has over 15 years of experience working in both large and small financial services firms. Before starting his career in finance, Matthew served as a U.S. Army Ranger. Matthew values transparency and fair dealing and enjoys helping people prepare for a great retirement.
Matthew is a CFA® Charterholder and CERTIFIED FINANCIAL PLANNER™ Professional. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and the Fee Only Network.