Over the weekend I drafted my monthly commentary and was about to post it until I read this article published by The Motley Fool on November 1. Long story short, though the S&P 500 has delivered a return of about 8.5% as of November 1, 2023, if you remove the following 7 companies from the 500 companies that make up the S&P 500 your return would be down nearly -4% through November 1, 2023!!!
- Apple (AAPL)
- Alphabet (GOOGL)
- Microsoft (MSFT)
- Amazon (AMZN)
- Tesla (TSLA)
- Meta – formerly Facebook (META)
- Nvidia (NVDA)
That is a whopping 12.5% swing to the negative! Now take this into context: if you have a diversified portfolio (which most investors have to lower concentration risk) as many as 120 out of 500 companies have seen their stocks fall by over 20% since July as discussed in this article published by the Business Insider. Additionally, investors can’t take comfort in bonds knowing the Fed has raised interest rates while pumping nearly $60 Billion in Treasuries per month lowering existing bond valuations. All of this can be summarized best by JPMorgan Chase CEO Jamie Dimon saying during his company’s earnings call last month “Now may be the most dangerous time the world has seen in decades.”
Now I don’t want to sound like a doom and gloom reporter, because for the past two (2) days we have seen stellar returns in the S&P but it is important to acknowledge that Wall Street is clearly spooked. The S&P 500 was down for October, landing its third negative month in a row. It would be the longest losing streak since the start of the pandemic in 2020 and we all know why…
High bond yields
Surging yields have contributed to one of the worst periods for bond market performance in history and pressured equity markets. As of this writing, the 10-year Treasury is flirting with a 5% yield for the first time since 2007, before the global financial crisis. For American consumers, an elevated 10-year Treasury yield means financial pain, because it means more expensive car loans, higher credit card rates and even student debt and higher mortgage rates. Higher yields also put pressure on equity markets. How? If borrowing cost for businesses are higher, then profit margins could shrink where those businesses pass that cost to you the consumer.
Strong Labor Market – WHAT???!!!
This sounds ridiculous but if the Fed wants to slow down inflation, they raise rates to curb your spending. Who wants to pay more interest on debt like credit cards or loans? No one!! However, the labor market has remained stubbornly resilient. Translation… the job market is making people feel as if they have money to spend which in the Fed’s view is creating inflation. Until the labor market cools down and inflation rates drop back to the Fed’s 2% target, the option of future rate hikes remains on the table, haunting investors.
Geopolitical strife
The Israel-Hamas war, which began in early October, initially rattled global financial markets, sending stocks tumbling. Although immediate worries appear to have subsided, investors remain on edge. Why? A prolonged war could drive prices higher (particularly energy prices) and hurt the global economy. Factor this along with the ongoing war between Russia and Ukraine and growing tensions between the US and China… and boom!! One starts to worry about a global recession.
Domestic Battles in the House
Thankfully, the Republicans decided on a new Speaker of the House. However, we now have the concern of a government shutdown, increasing national debt and an election taking shape for the White House.
All of this to say 2023 has been a hard market for most balanced and conservative investors. Don’t take my word for it. Just watch this Bloomberg video caption broadcasted on October 11, 2023. For now, iPlan investors can take solace in knowing that we have remained defensive capturing opportunities when they exist. We may not have captured all of the magnificent 7 returns, but we are encouraged given the environment.
Sources:
- You Might Be Shocked to Learn Where the S&P 500 Would Be in 2023 Without the “Magnificent Seven” Stocks | The Motley Fool
- Ford, BofA, Morgan Stanley Have All Plunged Over 20% Since End of July (businessinsider.com)
- JPMorgan CEO Issues a Stark Warning Amid Economic Highs and Global Uncertainty (msn.com)
- Why No Federal Reserve News Is Bad News For The S&P 500 | Investor’s Business Daily (investors.com)
- A Hard Market: Bloomberg Markets: Americas : BLOOMBERG : October 11, 2023 10:00am-11:00am EDT : Free Borrow & Streaming : Internet Archive
