CIG Asset Management Update: The Stock Market Rally May Be Broadening
In October 2023, we shared the CIG Asset Management Update: Year-to-Date U.S. Stock Performance in Pictures and we discussed how the Magnificent 7[i], seven mega-cap growth stocks, were driving the returns of the S&P 500.
This outperformance continued through year end as you can see in the December 31, 2023 FinViz heat map below.
Source: FinViz as of 12/31/2023
In the year, 2023, the Magnificent 7 stocks experienced an average return of +111% while the S&P 500 Index only gained +26%. The Equal-Weighted S&P 500 Index only gained +12%. If you removed the Magnificent 7 stocks from the Equal-Weighted S&P 500 Index, you would have only gained +8%. [ii]
The strong performance of the Magnificent 7 stocks has extended into 2024. As of February 29, 2024, these seven stocks have gained +12.7%, outpacing the S&P 500’s increase of +7.1% and the Equal-Weighted S&P 500 Index’s gain of +3.2%.[iii]
We believe the Magnificent 7 stocks are currently trading at levels considered expensive compared to historical standards. Torsten Slok, Apollo’s Chief Economist, has recently showed that when you compare the median 12-month forward price-to-earnings (PE) ratio of the top ten companies in the S&P 500, which include all of the Magnificent 7 stocks, they are much more expensive now than they were during the tech bubble of the 1990s. [iv]
Source:Bloomberg, Apollo Chief Economist. Note: Data as of January 31, 2024.
With that being said, we are seeing some encouraging signs that the stock market rally may finally be starting to broaden out. For the week ended 3/6/2024, we saw four of the Magnificent 7 stocks; Microsoft (MSFT), Apple (AAPL), Alphabet (GOOG), and Tesla (TSLA) move lower as many other stocks outside of the technology sector rose. You can see this in the March 6, 2024 FinViz heat-map below.
Source: FinViz as of 3/6/2024
While we find it encouraging to see a wider equity market participation, we still believe strongly in the value of diversification. Diversification is not supposed to maximize returns, it is designed to reduce investment risk. A diversified portfolio at times won’t keep up with the market when the bulk of returns are concentrated in a small group of stocks like the Magnificent 7. We strive to diversify our investments amongst industries and sectors, size (large-cap and small-cap), geography, growth versus value and alternative asset classes. Some of these investments are negatively correlated to the stock market – what that means is historically when the stock market traded lower – these investments gained in value. Past performance is not a guarantee of future results, but history helps guide us.
At CIG, we believe in risk-balanced investing. We believe investors should consider how much risk they are taking to achieve returns. We think that we should be striving to reach the return necessary to meet the various needs of our client’s financial plans while, at this point in the market cycle, taking as little risk as possible to meet that goal. We want you to sleep at night.
Please reach out to Brian Lasher (blasher@cigcapitaladvisors.com), Eric T. Pratt (epratt@cigcapitaladvisors.com) or the rest of the CIG team.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] The Magnificent 7 stocks are: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Nvidia (NVDA), Tesla (TSLA), and Meta Platforms (META)
[ii] https://www.forbes.com/sites/greatspeculations/2024/01/22/2023-in-review/?sh=78aab8bd690b
[iii] Calculated by CIG Asset Management for the Roundhill Magnificent Seven ETF (MAGS) using data from finance.yahoo.com
[iv] The Daily Spark, February 25, 2024 – Apollo Academy
Update from CIG Asset Management Team – Asset Manager Annual Checkup
In an era of consolidation in the wealth management industry, an annual check-up of who is managing your assets is important. With firms like LPL, Wealth Enhancement Group, Stratos Wealth Partners, it raises the question: Who is actually managing your money? Do you know the individuals on the company’s website?
We suggest that you conduct an Asset Manager checkup.
Annual Asset Manager Check Up List
Basics
ü Have you ever talked to the people who directly manage your hard-earned life savings?
ü If so, how often could/do you meet with them?
ü If not, how do they determine my risk tolerance and investment objectives and get to know you?
ü Is your advisor really doing the trades and asset allocation for your portfolio?
Advanced – Is the asset management offering compelling in regard to the following?
ü Performance- How does the strategy perform during up and down periods?
ü Selection- Do they actively manage the portfolio or is it invested in big technology companies all the time?
ü Insight- Is there common sense anchored in factual data, without rosy forecasts like we may often hear on TV?
ü New Ideas- Is there delivery of unique value through compelling theses? For example, Gold or Energy Sector investments at the right time.
ü Diversification- Do they utilize a variety of investments which complement existing illiquid holdings?
ü Trust- Are you going to trust this group to help you through the inevitable difficulties in the market? When risk appetites are high, are they good at restraining your exuberant actions? When risk appetites are low, will you feel comfortable restraining fearful activities and buying low?
At the end of the day, what kind of “ride” or investment experience are they offering you? People don’t retire on %’s but on actual dollars. How did you do in 2022? If you were down, are you back to even with stocks soaring this year?
In our last letter, What’s Your Benchmark, we talked about comparing your investment portfolio to an appropriate benchmark and comparing your investment portfolio’s 3-year risk and return. As of November 30, 2023, our analysis revealed that the CIG Dynamic Balanced Composite achieved a trailing 3-Year annualized return of +2.30%, net of fees. This performance surpassed the Balanced Benchmark’s +1.95% return, all while assuming only half the risk of the benchmark, as indicated by the standard deviation of returns that 3-year timeframe. [i]
In 2023, U.S. stock performance has been largely dominated by the Technology sector and Communication Services sector. [ii]
We believe that many investors are currently experiencing recency bias – the tendency to place too much emphasis on experiences that are freshest in their memory – even if they are not the most relevant or reliable. How quickly investors have forgotten about the very negative returns in 2022!
As seen in the two following bar charts, in 2022 at CIG, the CIG Dynamic Growth Composite avoided 60% and the CIG Strategic: SRI Growth Composite avoided 40% of the growth benchmark’s -17.27% loss. Net of fees.[iii] The CIG Dynamic Balanced Composite avoided 65% and the CIG Strategic: SRI Balanced Composite avoided 48% of the balanced benchmark’s -15.81% loss. Net of fees. [iv]
Calculated by CIG Asset Management using data from Tamarac. Represents performance from January 1, 2022, through December 31, 2022. Past performance is not indicative of future results. [v]
Calculated by CIG Asset Management using data from Tamarac. Represents performance from January 1, 2022, through December 31, 2022. Past performance is not indicative of future results.[vi]
Year-to-date through November 30th, 2023, domestic and international equities along with fixed income have rallied with some significant returns in equities.[vii] As seen in the following two bar charts our CIG growth and balanced composites continue to outperform their respective benchmarks on a 2-year cumulative basis through November 30th, 2023. Net of fees. [viii]
Calculated by CIG Asset Management using data from Tamarac. Represents performance from January 1, 2022, through December 31, 2022. Past performance is not indicative of future results. [ix]
Calculated by CIG Asset Management using data from Tamarac. Represents performance from January 1, 2022, through December 31, 2022. Past performance is not indicative of future results. [x]
As illustrated above, the ride with the CIG composites is smoothed out during volatile conditions and over the two-year period, the CIG composites are much closer to break-even than the benchmarks. For example, the difference as shown above between the Balanced Benchmark and the CIG Dynamic Balanced Composite is +5.02%.
Of course, in addition to portfolio construction, risk and returns, you need to ask if the overall organization that includes asset management is helping you achieve your goals. Your success is about looking at the whole picture:
ü Have they created a plan to help you drive meaningful levels of savings toward your goals?
ü Together, are you executing effective estate, tax, and philanthropy management programs?
ü Do they provide business consulting if you are an entrepreneur and business owner?
You hopefully get a medical check-up each year. What about holistic check of your wealth manager?
At CIG, we believe in risk-balanced investing. We believe investors should consider how much risk they are taking to achieve returns. We think that we should be striving to reach the return necessary to meet the various needs of our client’s financial plans while, at this point in time as described in our two most recent letters, taking as little risk as possible to meet that goal. We want you to sleep at night.
We counsel investors to understand what they are invested in – usually a diversified portfolio – and measure their results with the appropriate diversified, blended benchmark. Life is too short to be frustrated.
If you would like to discuss the results of your annual check or review how much risk that you are taking to achieve your returns, please contact Eric Pratt or Brian Lasher who would be happy to speak with you.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data that believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Calculated by CIG Asset Management using data from Tamarac and Zephyr
[ii] FinViz.com/map as of 12/28/23
[iii] Calculated by CIG Asset Management using data from Tamarac. The Growth Benchmark is a blend of 60% Russell 3000, 25% MSCI All-Country World ex US and 15% Bloomberg US Aggregate Bond indices.
[iv] Calculated by CIG Asset Management using data from Tamarac. The Balanced Benchmark is a blend of 45% Russell 3000, 10% MSCI All-Country World ex US and 45% Bloomberg US Aggregate Bond indices.
[v] Performance has been attested to by ACA Group for the period August 1, 2018, through December 31, 2022.
Strategy returns are calculated independently on a daily basis and linked geometrically to produce a monthly return. Total investment performance includes realized and unrealized gains and losses, dividends, and interest. Accrual accounting is used to record interest income while dividends are recorded on a cash basis. Trade date accounting is used for calculation and valuation purposes.
Past performance is not indicative of future results.
[vi] Performance has been attested to by ACA Group for the period August 1, 2018, through December 31, 2022.
Strategy returns are calculated independently on a daily basis and linked geometrically to produce a monthly return. Total
investment performance includes realized and unrealized gains and losses, dividends, and interest. Accrual accounting is used to record interest income while dividends are recorded on a cash basis. Trade date accounting is used for calculation and valuation purposes.
Past performance is not indicative of future results.
[vii] Calculated by CIG Asset Management from finance.yahoo.com. YTD – 11/30/23 S&P 500 =20.8%
Bloomberg Agreeable Bond Index- AGG to 1.89%
[viii] Calculated by CIG Asset Management team using data from Tamarac.
Performance has been attested to by ACA Group for the period August 1, 2018, through December 31, 2022.
Strategy returns are calculated independently on a daily basis and linked geometrically to produce a monthly return. Total investment performance includes realized and unrealized gains and losses, dividends, and interest. Accrual accounting is used to record interest income while dividends are recorded on a cash basis. Trade date accounting is used for calculation and valuation purposes.
Past performance is not indicative of future results.
[ix]Performance has been attested to by ACA Group for the period August 1, 2018, through December 31, 2022.
Strategy returns are calculated independently on a daily basis and linked geometrically to produce a monthly return. Total investment performance includes realized and unrealized gains and losses, dividends, and interest. Accrual accounting is used to record interest income while dividends are recorded on a cash basis. Trade date accounting is used for calculation and valuation purposes.
Past performance is not indicative of future results.
[x] Performance has been attested to by ACA Group for the period August 1, 2018, through December 31, 2022.
Strategy returns are calculated independently on a daily basis and linked geometrically to produce a monthly return. Total investment performance includes realized and unrealized gains and losses, dividends, and interest. Accrual accounting is used to record interest income while dividends are recorded on a cash basis. Trade date accounting is used for calculation and valuation purposes.
Past performance is not indicative of future results.
Diversification Can Help Protect Against Market Crashes
The idea of diversification is very old and can be, in
some cases, useful for survival. How many times in life have we heard “Don’t
put your eggs all in one basket?” In investment terms, market crashes like the
one we witnessed in March 2020 can happen. Losses such as these can be bad for your
financial and mental health as well as your ability to meet your financial plan
or retire. Diverse investment strategies and assets can behave differently in
various crashes, and this differentiation of responses increases the chance
your portfolio will survive a market crash. Here’s why a diversification
strategy is important:
Diversification
in terms of investing became more popular in the early 1990s and really took
off in the early 2000s. Whether it is emerging market bonds, wind parks, real
estate, etc., the diversification argument became more obvious after the DotCom
Crash of 2000. At its core, diversification forces you to “buy low and
sell high,” an adage that is arguably commonplace and easily mocked. But
it really works. Just look at March 2020’s market returns.
In March 2020, COVID-19 appeared to impact most asset
classes. As a result of our investment strategy and process, we became worried
about the asset valuations in early to mid-2019. This led us to diversify away
from an over-concentration in stocks and into a more varied portfolio of
assets. Consequently, we were better
prepared for March 2020 and had exposure to longer-dated Treasury bonds and
gold, which were some of the only major asset classes up last month.
In 2019, prudence and
diversification came under fire. With the S&P 500 Index up a massive 31%[i], investors
with diversified portfolios felt like they left money on the table. In 2020,
diversification came roaring back as investors realized the above-mentioned benefits
of having parts of their portfolio perform when risky assets struggle. What a
difference a few weeks and months can make! March 2020’s crash was the quickest
decline in stock market history[ii]. During
market crashes, diversification not only helps to potentially shore up returns,
but also provides a source of money for rebalancing. With a 20% decline in
equities in just under a couple of weeks, buying low and selling high is paramount
for investment success over the long term.
In
March 2020, the Federal Reserve balance sheet has increased +$1.1 trillion and
the European Central Bank’s balance sheet has increased +$400 billion[iii].
Another $2 trillion fiscal stimulus bill is being considered in the U.S.[iv]
So, we may yet again be lulled into believing
that a period of elevated U.S. stock market valuations and low market
volatility could persist throughout this decade. In that case, diversification may
return to its regret-maximizing ways, where there will often be an underperforming
asset (in this case, bonds or cash) in your portfolio that you wish you had
sold, just like there will often be the asset (usually, equities) you wish you
owned more of because its price went up the most. That said, when market
volatility inevitably returns, you realize that staying diversified is worth it
in the long run.
At CIG Capital Advisors, we attempt to pursue diversified
portfolios for clients by employing the following thought processes. First, we
invest only in investment choices we understand. Second, we determine
investment and asset allocations based on collecting as much data as possible,
employing common sense constraints, doing fundamental research, and rebalancing
portfolios regularly. Lastly, we adapt to change, try to learn continuously,
seek new sources of returns, and re-evaluate allocations regularly. We tend to
shy away from an investment with an effortlessly smooth return history. These might
or might not be safe as many of these strategies are the equivalent of picking
up pennies in front of a steamroller.
While
there are many known unknowns related to COVID-19, we anticipate continued
volatility in the near term as the economic fallout from the pandemic is
realized. As always, we maintain diversified, risk-balanced portfolios for
clients to help ride out potential market selloffs, and to evaluate, and
sometimes capture, the opportunities that present themselves. We conclude with
a famous quote from Benjamin Graham, the British-born American investor known
as the “father of value of investing,” “the essence of investment
management is the management of risks, not the management of returns.”[v]
Thus, diversify!
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i]
Yahoo Finance
[ii]
Bloomberg, Goldmoney Research
[iii] https://docs.google.com/spreadsheets/d/1s6EgMa4KGDfFzcsZJKqwiH7yqkhnCQtW7gI7eHpZuqg/edit#gid=0
[iv] Source:
“How big could the Fed’s balance sheet get?” Financial Times, April 5, 2020
citing a report from Bank of America