Summary:
* Are we in a new bull market?
* S&P 500 performance continues to be concentrated in only a few names.
June 2023 Returns:
| Benchmark / Index | Return | Benchmark / Index | Return |
|---|---|---|---|
| Growth Benchmark[i] |
4.7% |
Balanced Benchmark[ii] |
3.4% |
| S&P 500[iii] |
+6.6% |
Bloomberg US Agg Bond[iv] |
(0.4%) |
| MSCI EAFE[v] |
4.6% |
MSCI Emerging Markets[vi] |
3.8% |
| Gold[vii] |
(2.2%) |
Crude Oil[viii] |
+3.8% |
Commentary:
Domestic equities continued to rally in June after President Biden signed the Fiscal Responsibility Act of 2023, which raised the debt limit into law on June 3, 2023, ending the current debt limit crisis.[ix] On June 8, the S&P 500 rose, putting the index +20% above its October 12, 2022 low – possibly signaling the start of a new bull market.[x] A bull market is commonly defined as a +20% move in stock prices.[xi] The technology-heavy NASDAQ 100 index gained almost +40% for the first half of 2023 – its best first half ever.[xii] Crude oil regained some of May’s losses, advancing +3.8% for the month.[xiii]
Are we in a new bull market? Technically, when measured from the October 12, 2022 low, the answer is yes. However, the recent rally in stocks has not been broad based. A small number of mega-cap technology stocks have driven returns. Michael Hartnett, investment strategist at Bank of America, has referred to the biggest seven mega-cap monopolistic U.S. tech stocks – Apple, Amazon, Microsoft, Meta, Alphabet, Nvidia and Tesla – as the Magnificent Seven.[xiv] As seen in the following chart, year-to-date through June 30, 2023, the Magnificent Seven gained +61.2%.[xv] The S&P 500, a market cap weighted index, gained +16.8%[xvi] as the equal-weighted S&P 500 was only up +6.9% during this same period.[xvii]
According to J.P. Morgan Asset Management, the top ten largest companies in the S&P 500 accounted for over 95% of the index’s year-to-date return for the first half of 2023.[xviii]
Historically, when a small number of stocks dominate overall market performance, it is not automatically a reason to sell equities. Sometimes the rally will broaden out to stocks that have lagged in performance and sometimes the outperforming stocks will give back some of their returns. While we are hopeful the current rally will broaden out to lagging stocks, we are cautious as many strategists expect a recession at some time in the next twelve months. As we wrote about last month in Technology Bubble 2.0?, it is our opinion that the current outperformance of the Magnificent Seven has been driven by artificial intelligence (A.I.) mania and we are skeptical that the gains can hold. Six of the seven Magnificent Seven stocks are experiencing sharply declining sales and earnings growth this year.[xix]
CNN’s Fear & Greed Index has reached the “Extreme Greed” level as seen in the graphic below.[xx]
Source: https://www.cnn.com/markets/fear-and-greed as of 8:53am, 7/25/2023
We agree with legendary investor Warren Buffett’s thoughts on fear and greed. Buffett, in his 1986 Berkshire Hathaway letter to shareholders famously wrote, “What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”[xxi]
Many investors currently have FOMO – fear of missing out. We believe many investors are experiencing the disease of greed and it appears dangerous to chase the returns of the Magnificent Seven stocks. Some investors have suffered in the past when they chased returns for fear of missing out. Chuck Prince, CEO of Citigroup in July 2007 was interviewed by the Financial Times regarding his company’s investment exposure and said that global liquidity was enormous and, “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”[xxii] As Prince was saying “get up and dance” in July 2007, Bear Stearns was bailing out two hedge funds with $20 billion of exposure to subprime mortgages. Many historians cite Bear Stearns as the beginning of the 2007-2008 Great Financial Crisis (GFC). During the GFC, stock markets experienced large drawdowns and it took years for investors to recover. We wrote about just how long it took markets to recover in What If the Bubble Bursts?[xxiii] Some stocks never recovered – Citigroup’s stock currently trades -90% lower than where it was in July 2007.[xxiv] Citigroup’s CEO may have better served his shareholders if he sat the dance out. Have investors already forgotten that earlier this year we experienced three of the four largest bank failures ever – First Republic Bank, Silicon Valley Bank and Signature Bank?[xxv] The Federal Reserve has not forgotten. On July 10, Michael Barr, the Federal Reserve’s Vice Chair for Supervision announced that he is advocating tougher bank capital requirements and tougher annual stress tests for U.S. banks.[xxvi] Will tougher banking requirements affect liquidity?
At CIG, we are not entirely sitting the current dance out. We are limiting our equity exposure. At the end of June 2023, our CIG Dynamic Growth Strategy held -29% less U.S. equities than the growth benchmark.[xxvii] We have taken this difference and put it into liquid alternative investments which helped us outperform the markets last year and aim to offer some protection again should markets sour in the second half of this year.
To attempt to strike the right balance in client portfolios, we think that we should be striving to reach the return necessary to meet the various needs of our clients’ financial plans while taking as little risk as possible to meet that goal. For many clients, now at mid-year, we are halfway there.
We would like to hear from you. Please reach out to Brian Lasher (BLasher@cigcapitaladvisors.com), Eric T. Pratt (EPratt@cigcapitaladvisors.com) or the rest of the CIG team.
