Monthly Outlook: March 2024
The rally off the October lows continued through February and nearly every market is trending higher (above its 200-day moving average price trendline). As a result, we remain “all in” for growth and have less than two percent in Cash. Our portfolios under management are up 9% to 16% since October, depending on which allocation model they’re in. That’s in line with market benchmarks, too, so we’re capturing all the gains that the markets have to offer. As the common wisdom goes, “Cut your losers quickly, and let your winners run.” We’re doing that.
The economy, and the markets as a reflection, are in a sweet spot for now. Yes, the Federal Reserve has hiked interest rates from 0% to 5.25%, which hurts borrowers. But it’s working to gradually quell inflation (CPI is down from 10% to 4%) and stabilize prices. Earnings are still good with many companies reporting earnings growth and solid outlooks. Lastly, the excitement over artificial intelligence (AI) is palpable, as investors extrapolate years of future benefits into current stock prices. We’re living in a Lego movie scene, “Everything is awesome!”
Market Breadth is Improving
You may recall that markets started to roll over last October, as investors were concerned that the Fed’s rate hikes would result in an economic slowdown and possible recession. Either that concern was wrong or, at a minimum, early. Instead, AI stocks came to center stage in November and the Magnificent Seven Big Tech stocks rocketed upward. Due to their mega-cap size, the Mag 7 stocks pulled the market indexes up with them and accounted for the vast majority of the index gains.
The S&P500 includes 500 of the largest U.S. stocks, as the name implies. But with the surge in Big Tech, the Mag 7 (Microsoft, Apple, Nvidia, Google, Amazon, Meta, Tesla) now comprise 29.3% of the entire S&P500. That’s about as narrow breadth as the index has ever seen. Microsoft and Apple, the #1 and #2 biggest stocks in the world, are both $3 trillion market-cap companies. For comparison, the #500 stock in the S&P500 is Whirlpool with a market cap of “just” $5.8 billion. That’s still a big company. But Microsoft is 517x as big! That means it counts 517x as much as Whirlpool in the S&P500 index. If Whirlpool’s stock price doubled tomorrow, it wouldn’t even show up in the S&P500 index.
All that said, we are seeing some rotation from Big Tech and Mag 7 stocks into some of the other sectors like Financials, Energy, Staples, etc. In other words, breadth is widening out from US Growth to US Value stocks. We also see more interest in International and Emerging market stocks. That could be for one of two reasons: Investors could be taking some profits from Big Tech but want to stay in the market so they’re buying the laggards in US Value and International, or they truly believe US Value and International stocks offer good growth prospects so they’re adding money to these markets as well. Is the rotation a temporary placeholder and stall before a correction or is it a good sign of strength and a continued rally?
Using Our Time Productively as We Wait
For now, we’re letting our winners run and keeping our foot off the brake. But that doesn’t mean we’re blind to risk and the possibility of a stock market correction. There are many indicators flashing recession including rising unemployment, un-inverting yield curve, slowing retail sales, rising credit card balances, and so on. The Fed’s interest rate hikes have a 12-24 month lagged impact on the economy, and we may be just beginning to feel the effects. Valuations are at 100-year peak levels similar to other stock market highs. It’s shaping up to be a contentious and divisive political year. And there are too many warring hot spots around the world that add risk.
Our iFolios investment strategy has always been focused on balancing the desire for growth (as we’re doing now) with the need for protection during drawdowns (as might be needed later this year). We follow each market closely and observe changes in price trends that might trigger a sell signal. We know precisely where our stop loss prices are and we always “drive with brakes,” though we don’t always have to use them. We encourage all other investors to use these good times to develop a protection plan before you might need it, or call us for assistance.