Following economic news, and trying to make sense of the big picture, can be a challenge. While some indicators are rising, others are decreasing, some pundits are calling for inflation, and others a recession. There’s always “breaking news” or perhaps we should call it breaking noise.
As usual, some of the information you receive may be a little confusing, incomplete, or misleading. The following discussion offers clarification and our insight into recent developments in the news.
The Cap Weighted and Equal Weighted S&P 500
As of September 25th,, the cap-weighted S&P 500 was up 12.5 percent year to date, yet the S&P 500 equal weight index was up just 1 percent. Many stocks are below their 52-week high or are negative for the year.
“Wait a minute,” you may be thinking. “How could a market index be up when most of its constituents are down? ”The S&P 500 is weighted by market capitalization. Essentially, the bigger a company is, the more room it takes up in the index. As a result, these indexes can get top-heavy. Currently, the top seven stocks in the S&P cap S&P-weighted index account for approximately 30 percent of its value.
The top seven stocks — Microsoft, Apple, Alphabet, Amazon, Tesla, Meta Platforms and NVIDIA — have seen significant gains after a bleak 2022, and the collective gains have kept the S&P 500 in positive territory in 2023. When the holdings of the S&P are equally weighted, the returns are flat.
Because most portfolios are not overweighted in the “magnificent seven,” the equal-weighted index is the better benchmark to look at. The equal-weighted version of the S&P 500 Index was launched in December 1989. While the Equal Weight index is lagging the cap-weighted in 2023 it has it has outperformed the cap-weighted S&P 500 Index by an annualized 100 basis points per year since its inception. It’s important to note that it is not possible to invest directly in an index. When comparing a portfolio return to an index, we must consider expense and other factors. Moreover, a portfolio may be managed for tax efficiency and can provide a higher net after-tax return for you, even if the total return pre-tax is lower than the index.
Ultimately, we believe that the most important benchmark for clients is meeting their individual needs — not outperforming a random index.
The Fed’s Rate Hikes
Another looming question is whether the Federal Reserve is finished raising rates.
The Fed took a pause on interest-rate increases in September. There are economic signs to support the proposition that the Fed’s rate-hike cycle has done its job — slowing the economy enough to cool inflation —and can be ended. Whether the central bank still sees the need for another increase is a key question as we head into the final months of 2023 and the beginning of 2024.
As always, we are not market forecasters or timers — nor do we believe that you need to be, either, to meet your overall goals. We do believe you should have enough cash for any anticipated expenses in the next 6 to 12 months so you can ride out any market volatility. Currently, many money market funds are yielding 5.25 percent or greater, and we are seeing FDIC-insured CDs that are one year or less that are paying 5.6 to 5.75 percent. If you have excess cash in the bank, you may want to consider these vehicles.
The Opportunity in Volatility
Financial markets kicked off 2023 with renewed volatility amid persistent inflation concerns, expectations for Fed rate hikes and escalating geopolitical tensions over Russia and Ukraine. The pace of change and overall media negativity has never been greater. Although this constant onslaught of negative news can be annoying, we believe it presents an opportunity for you. Market corrections can cause a lot of anxiety, and we expect continued volatility in the months and years ahead.
Heraclitus, a Greek philosopher, is quoted as saying, “Change is the only constant in life.” That is true of the markets as well. Because we know volatility is a given, we can leverage it to buy into potential opportunities that might have been out of reach at other times.
Consider that financial markets have historically seen a significant pullback at some point during most years while still delivering positive returns over the full year. For example, in 2018, the S&P 500 saw a market correction of more than 10 percent in the first quarter of the year and again in the fourth quarter, followed by a rebound of more than 13 percent in the first quarter of 2019.
Pullbacks have historically been followed by rebounds. Since 1974, the S&P 500 has risen an average of more than 8 percent one month after a market correction bottom and more than 24 percent one year later. These market corrections may be more common than you might think. Over the seven years since March 2015, there have been five corrections and one bear market. A bear market is a pullback of at least a 20 percent decline from a recent high.
It’s important to remember that market pullbacks are not uncommon — and occur in most years. These market corrections can be healthy in resetting stock valuations and investor expectations within a longer-term market advance. Having a long-term, strategic asset-allocation plan and sticking to that plan through periods of market volatility can help keep you on the right track. We design your portfolio to provide broad diversification across up to 20 asset classes, including defensive asset classes such as cash that can help you withstand these inevitable periods of volatility. This broad diversification, along with a proactive rebalancing process, can help provide you with the discipline to remain calm during periods of short-term volatility while helping you achieve longer-term objectives.
The goal is to meet your needs and risk profile — not to beat a random index. So, while the economy, the markets and the world itself continue to change at dizzying speeds, we focus on your personal vision.
We Are Different
Thousands of firms sell investments and/or offer financial planning from an investment-centric view. We are not one of them. We view investments and planning merely as tools for truly helping you live your best life possible. We are not a financial planning organization; we are a personal vision organization. We are always here to provide advice on anything that matters to you and that is consistent with your personal goals and vision; whether it is about a trip to take, a tax strategy or an investment. The more we understand what’s important to you, the better we can design and implement a plan that will help you get there — regardless of what’s happening in the media, markets or economy.
Please reach out to me personally, or to any of our team, with questions, concerns or if we can otherwise be of service.
Randy Carver, CRPC®, CDFA®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Carver Financial Services, Inc., was established in 1990 with the vision of making people’s lives better — clients, team and community. With this mission, Carver Financial Services has grown to be one of the largest independent financial services offices in the country, managing $2.3 billion in assets for clients globally, as of March 2023. You can reach Randy directly at email@example.com and in the office at (440) 974-0808.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Carver Financial Services and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance does not guarantee future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.