Market Data for the Quarter Ending September 30, 2023:
- S&P 500 Stock Index: 4288, down 3.6%
- Ten-year Treasury Note Yield: 4.57%, up .75%
- Gold: $1,849 per ounce, down 3.7%
- Oil: $91 per barrel, up 28.2%
The S&P 500’s liquidity and artificial intelligence hysteria-fueled rally of the first six months of the year stalled and moderately reversed in the third quarter of 2023. Indicative of a decline in overall market liquidity (availability of money), bond yields leaped higher in response to stronger than expected US economic data and increased government borrowing requirements. Oil, meanwhile, surged on the back of significant production cuts by Saudi Arabia and Russia. While typically being a negative for economic growth, such a substantial increase in the price of oil (28% in three months) is particularly problematic at present given that the Federal Reserve is still struggling to bring price inflation down to its 2% long-term target.
Looking inside the performance of the S&P 500, its still robust 12% year-to-date advance remains on the back of glamorous and exciting “Big Tech” stocks, such as Amazon, Nvidia, and Tesla. Such is the continuing dominance of Big Tech that outside of the seven most valuable stocks traded on the Nasdaq, the S&P 500 is virtually unchanged on the year. This is a phenomenon you are certainly aware of if you have been following the relative performance of your portfolios in 2023.
While 2023 has so far made competing with a market dominated by a handful of “must own” stocks look like an exercise in futility, we are confident that this dominance is coming to an end. Simply put, this market is a textbook “new era” mania where many investors believe a certain group of companies will CONTROL the future of business such that owning ANYTHING else is a recipe for destitution. The upshot is that while many (not all) of these companies are indeed great businesses, investors have long since given up on trying to figure out what they are worth. They feel COMPELLED to own them simply because everybody else does, and there is NO worse fate in investing than having to watch other people make money. This is not a new phenomenon in investing, and it is impossible to see how it will end any differently than previous episodes of “buy at any price” speculative euphoria: heavy losses.
Our confidence in this forecast is based on our view that the current bout of speculation is the culmination of a macroeconomic phenomenon that has ALREADY come to an end. The ethos of speculation over investment on display was developed over the course of a decade where the Federal Reserve intentionally flooded the market with money to stimulate economic growth via financial euphoria. The surge of inflation experienced over the past two years has demonstrated that this policy, often referred to as “quantitative easing,” was pushed beyond its breaking point and is unlikely to make a reappearance absent a full-blown economic crisis. This being the case, liquidity in financial markets will continue to fall such that recklessness with one’s money will no longer be an affordable luxury and a discipline of ensuring you get a suitable and sustainable return on your investment, which is what we do, will return to its long-term position of preeminence.
(One additional point to back our negative take on Big Tech stocks: In spite of the intensity of this year’s speculative euphoria, the major tech-focused stock index, the Nasdaq 100, is still 11% below its all-time high hit in November of 2021. This is a distinct indicator of weakness regarding tech stocks.)
For the remainder of 2023, we see the market, as represented by the S&P 500 stock index, trading in a range of 4000 to 4600 – it is currently standing at 4288. While we are certainly bearish on many of the stocks that have gone berserk in leading the market higher, our negative outlook is tempered by our view that the balance of the market (having been almost completely ignored by investors amidst their over-the-top enthusiasm for Big Tech) is cheap to reasonably valued. Additionally, the fourth quarter has historically been a positive one for stocks on account of the good cheer of the holiday season and budding optimism for the prospects of the coming new year.
As always, we appreciate your business and the confidence you have placed in us and hope you have a healthy and prosperous remainder of 2023. Please do not hesitate to contact us if you have any questions regarding your investments.