By: Herbert Diamant
After nearly a 10% upsurge in November, the S&P 500 Index is up 18% year to date. However, only a few of the underlying stocks in this index moved up this much. The primary reason for this skewed index move is attributed to just one stock. Nvidia, which specializes in making graphic processing units for artificial intelligence, pushed this index moving 14% higher. Overall, it has been a lower return for the rest of the market. This is seen in the equal weighted S&P 500, which is up 5% for the year. And nearly all of that movement occurred in the last few weeks. While the technical trend looks higher, markets moved from slightly undervalued, to overvalued and overbought, leaving a market “priced for perfection”.
In such a challenging environment, our focus centers on refining our investment strategy and recognizing the pivotal role that cash plays in your investment portfolio. The mantra “buy low, sell high” is core to our investment philosophy, so we refrain from purchasing stocks that are at or near all-time highs. We have not yet found a good entry point to fully invest your funds. In our observation, it seems that the market is priced very optimistically.
From a macroeconomic perspective, the Federal Reserve delivered an expected pause two weeks ago, and the market has priced in no additional hikes. However, we still see risks of sticky inflation keeping the higher-for-longer rate regime in play. We expect that the market will remain choppy, with headwinds from slowing economic growth, heightened geopolitical risks, policy risks from the 2024 presidential election, and the consequences of tighter financial conditions. These factors introduce substantive uncertainty into the market environment and because of this, we believe that cash is a key component of a diversified investment portfolio for you.
On a company specific basis, if a company misses a quarterly earnings report, the stock price is decimated. However, the opposite is rarely the case, where topping expectations has no commensurate reward. As long-term investors, discarded undervalued stocks present opportunities. Walmart did not have as rosy an outlook as expected on its recent earnings call and their shares fell over 8% in a day. This is a noteworthy decline when overtime conservative stocks return about 7% a year. After such a drop, their upside/downside profile is more compelling than many of the stocks at all-time highs that lead this rally.
Right now, it makes sense to hold high money market balances rather than own too much stock that is vulnerable to a decline should economic data or earnings disappoint. Additionally, earning 5% on cash provides a compelling return while having capital that can be utilized opportunistically to purchase stocks when they become more attractively priced.
If you have any questions about portfolio advice and management, give us a call or email us at info@portfolioadvisor.com.
