Uncertainty in the Markets

Uncertainty can create an underlying uneasiness around what the future holds. We have the desire to know what will come next or how things will work out so we can feel secure in the future and our path forward. Major changes over the last several years along with the challenges in our political and geopolitical environments have given us a reason to long for a sense of certainty that gives us confidence in what is to come.

The first quarter of the year we continue to see the same tech names that led the market at the end of last year. The S&P 500 continued to gain ground, advancing 10.6% for the quarter. These few concentrated stocks contributed 60% of the S&P return in 2023. However, during the quarter, we are now seeing that only 40% of the return is attributed to these concentrated stocks. The obsession over these seven stocks shifted some in the first quarter seeing stocks down like Alphabet Inc (Google) -2%, Apple Inc. -7% and Tesla Inc. -18%. If the party is over for a brief period of time in these stocks, only time will tell. We need to look beyond the few stocks that have driven higher indexes.  Since valuations have become stretched in these stocks, investors need to step out of the excitement, pause and consider taking profits to rebalance their portfolios.  Do not lose sight of the other 493 stocks in the S&P 500 or the rest of the stocks in the broader market. We may be seeing in early 2024 a broadening out into other sectors of the economy with the most recent declines in the technology sector. 

Looking ahead

In the past decade, the overall stock market concentration has been the steepest in 60 years, with just a few stocks driving most of the returns. In a recent article Dubravko Lakos-Bujas the Chief Global Equity Strategist for J.P. Morgan commented on whether high stock market concentration would continue in 2024: He said, “In the past, steep rise in concentration and narrow leadership has always reversed, with the S&P 500 equal-weighted index outperforming the market cap-weighted index.  The peak in this concentration episode is likely to coincide with the inflection in the business cycle, recession, and greater anti-trust regulations.[1]  Khuram Chaudhry, Head of European Quantitative Strategy at J.P. Morgan, believes that Liquidity could play a key role since he has seen a sharp fall in money supply growth across regions.  According to Chaudhry, if liquidity starts to grow, market concentration may well increase further, however he goes on to say: “But if money supply growth rises as the Fed cuts rates and the U.S. dollar declines, a reversal in the market concentration could be a key risk in 2024.”[2]

Investors have become infatuated with the stock market concentration and in turn have fundamentally lost sight of the added risk associated with concentration in too few stocks.  How do investors prepare for the unknown? Investors need to manage the overall risk within their portfolios and be willing to take profits as stock prices rise. No one knows when a sector or a basket of stocks will run out of gas. The best advice is to take profits and trim back the holding(s) and rebalance the overall asset allocation. Keep in mind that most investors will need at some point in time money to fund retirement, education, home improvements, travel or may need cash for everyday needs. We strongly encourage investors to adhere to a strategic plan that aligns with their risk parameters. Investors that remember 2008’s 57% decline in the S&P 500 know how important diversification lowered their emotions and buffered their portfolios from significant decline. Emotions can run wild if you need money when the market takes a downward direction. Investors can become delirious during these times of uncertainty and make irrational decisions. Investors need to develop a strategy that incorporates within their asset allocation their tolerance for risk.

 As we think about the uncertainty we are faced with this year, we recognize that there are many unknowns that could derail our progress, but we remain optimistic about the long-term prospects for equities within the context of a diversified portfolio. In the quarter ahead we may see some added volatility due to the Federal Reserve with respect to inflation and interest rates, geopolitical tensions, and the upcoming election. 

It is important for all of us as investors to evaluate our asset allocation during times of uncertainty. Managing our risk provides us with confidence to withstand the unknowns.   No matter what the uncertainty you can be assured that the diversified asset allocation considers the underlying uneasiness around what the future holds.  

As always, we appreciate your ongoing commitment to our philosophy and welcome your questions. Enjoy Spring and we will look forward to meeting with you in the upcoming months. 

^{IMPORTANT DISCLOSURES: The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy.  Information obtained from sources is considered dependable but is not verified. The research and other information provided herein speak only as of its date. We have not undertaken and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information. The performance information presented is not an indication of future results and index data is provided for market reference purposes only. This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any trading strategy. This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed.  This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy. This material is for educational purposes only. Mis-transmission is not intended to waive confidentiality or privilege.}

[1] JP Morgan Global Research February 15, 2024.  

[2] JP Morgan Global Research February 15, 2024.