Ron Rough, CFA, presents our July video market update and shares what FSA is doing to respond.
Stock Market Update Transcript
Hello, this is Ron Rough with the market update video for July. Wow, another great first half of the year. I was looking back, and I think I was saying the same thing a year ago at this time. The S&P was up well over double digits. Everything was moving. And here we are a year later, first half of this year. It’s a lot of the same thing. If you look at the chart here I’ve got of some individual stock indices and bonds and commodities, you’ll see everything is up with the exception of the intermediate bonds, which are down just slightly for the year. Again, interest rates have really not come down. So, it’s been a rough go for the fixed income world, but equities for the most part are up. The thing that’s really noticeable when you look at this chart is the S&P 500, how much ahead of everything else. It’s up 15%. Everything else you look at is up mid single digits, small caps only up 2%, so there’s this huge split in the market between what is doing well and everything else.
You can see it again from this next chart where I’m just looking at individual sectors that make up the S&P. So again, we’ve got an index up over 15%, but look at what’s really driving the index returns. There are two sectors, communication services, which is basically Google and Meta, and you’ve got technology, so think Apple, Microsoft, and Nvidia. Those things are up over 20%. Look at the other nine sectors. As a group, they’re up on average, maybe 5%. So that really, in a nutshell, shows you what was going on this first half of the year, a handful of big technology stocks driving all of the returns.
And everything else, not that it’s bad. We’re only six months into the year, and you’ve got most other indices up 5 or 6%. Nothing wrong with that. You annualize that, and you’re looking at 10 or 12% returns; that’s actually what we should expect from the markets. So not bad, but that great return from the S&P is really masking what’s going on under the surface.
This next chart really points that out in an interesting way. You’re looking at the percent of stocks that have actually outperformed the index in the S&P 500, and if you look at it over time, this is going back to early 70s. So you’re looking at, on average, you’d expect somewhere around 50% of the stocks, right? If you’re looking at an average 45 to 55%, maybe. Well, this year we’re on pace. Now again, we’re only halfway into the year. We’re only on pace for only 25%, one stock out of four to actually be outperforming the index. And we haven’t seen a low number like that ever. And the only other years where the numbers are close to that are last year and then the years ’98 and ’99, and we all know what happened in the aftermath of those two years. We had the internet bubble burst, and we had a three-year bear market.
So, I’m not calling for that in this situation, but it does show you the market is not that healthy if we have such a small number of stocks pushing the index higher, which is, this is our big bugaboo, if you will, about the market. Otherwise, you have to be pretty comfortable with the trends, the S&P trends, certainly, large-cap trends in particular. But even if you look at the other indexes, the equal-weight S&P, the Dow Jones Industrial, foreign stocks, there’s nothing wrong with those charts. They’re all in an uptrend, even though it’s a messier uptrend than we see with the S&P 500. But the narrowness of the market is our big concern, and we’ve talked about this off and on now for over a year. So, at some point, I wonder if I’m starting to sound like a broken record, but that’s our concern. And does it mean the market has to fall as it did in 2000? Not necessarily. There could be some other trigger that could broaden this market out. Maybe it’s the Fed cutting interest rates for the first time. Maybe that would give a lift to small caps. Maybe that would give a lift of financial stocks or value stocks in general. That’s what we’ll have to wait for.
Finally though, I’ll leave you with this chart. We’ve had a great run in the first half of the year. Historically, the first half of the year is as strong as it has been. The second half of the year typically is as well. But this chart here gives us a little pause. This is going back 100 years, basically, and it says in an election year, from July through October, volatility in the market picks up. Volatility in the market picking up generally means choppier, more difficult times. So this is another piece of evidence that has us more cautious in the second half. Not that we’re doing anything in anticipation of that, but it has our antenna up to be aware of a changing environment here in the second half of the year that could lead to a more difficult, more challenging environment than we’ve had in the first half of the year.
But for now, we’re comfortable with where the portfolios are, that is fully invested. We’re comfortable with how things have went in the first half of the year. Accounts are sitting at all-time highs. We’ll see how the second half plays out, but given our tactical nature, hopefully we’ll be ready for whatever the market throws at us.
So until then, thank you for watching.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at www.FSAinvest.com/disclosures or by calling 301-949-7300.
