Markets: First Negative Quarter of 2023

After three consecutive quarters of positive returns the S&P 500 index fell -3.27% in Q3. The index, however, still had positive double digit returns of 13.07% for the first nine months of 2023. The stocks frequently referred to as “The Magnificent Seven,” Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla accounted for approximately 85% of the gain. Without the “Seven” mega-cap growth stocks, the S&P 500 would be up less than 2% for the first three quarters of this year.

Small cap growth stocks also outpaced their small cap value brethren this year. The Russell 2000 Growth Index was up 5.24% while the Russell 2000 Value Index declined -0.53% since the start of the year. In Q3, the Russell 2000 Growth Index dropped -7.32% while the Russell 2000 Value Index was negative by -2.96%.

International markets were negative, too, in Q3. The MSCI EAFE international index declined -4.71% in the quarter, but it is up 4.49% through the first three quarters of 2023. The Fed raised rates 4 times in 2023. As a result, the Bloomberg US Aggregate Bond Index was down -1.21% for the first 9 months of 2023.

The Fed: Pause Amid “Higher for Longer” Narrative

Remarks by Fed Chairman Jerome Powell of “higher for longer” rates sent bond traders scurrying. Bond yields first dropped in anticipation of a slowing economy, but yields then rose as inflation numbers of 3.7% were reported. The Fed left rates unchanged, however, at its September meeting, with a current range of 5.25% to 5.5%. At the end of the quarter it was nearly an even bet that there would be one more rate increase before the end of the year. In just the past few weeks the likelihood of another increase has decreased to less than a one-in-three chance according to interest-rate futures pricing. The Fed also projected two rate cuts in 2024, but this is much less than the previous 4 cuts it anticipated at its June meeting

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Inflation: Resilient, Too

We continue to believe that the easy part of dampening inflation has occurred. Inflation has gone from 9.1% in June of 2022 to 3.7% in September of 2023, but unchanged from the previous month. The Fed target of a 2% inflation rate is now projected for 2025.

Short-term, risk-free treasuries continue to yield over 5%. This is enticing for both fixed-income investors and equity investors who are concerned with stock market volatility. As we’ve stated previously, long-term investors who build and maintain portfolio asset allocations appropriate for their time horizon and risk tolerance may still come out ahead in the long-run.

We Are Here for You

The New Year provides many great opportunities to get a financial plan in place or reevaluate your risk profile. The Platt Wealth Management team is here for you to discuss any changes or new milestones in your life. We are always available to assist you with any financial matters and we look forward to continue to serve you along your financial journey.

Warmest regards,
Platt Wealth Management

The Market

It was mostly steady gains on Wall Street last quarter, with record highs achieved by the S&P 500, Nasdaq, and Dow Jones Industrial Average (DJIA). The S&P 500 was up just over 15% mid-year. The DJIA was up, too, although it lagged behind the other growth-oriented indices. The Dow was able to breakthrough the 40,000 level before closing just above 39,000, while the S&P 500 marked the longest streak without a daily 2% drop since the Great Recession.

Nvidia became the largest company by market capitalization in the S&P 500 Index, surpassing Apple. The “Magnificent 7,” which includes Nvidia, Apple, Microsoft, Alphabet (Google’s parent company), Amazon, Meta Platforms (formerly Facebook), and Tesla, collectively dominate the index more than ever before.

Government data shows that consumer inflation, as measured by the Consumer Price Index, peaked year-over-year in June of 2022 at 9.1% and declined steadily throughout 2023. However, it may not feel like it when you purchase goods and services. “Stuff” is still expensive, with service pricing and housing pricing remaining stubborn.

Meanwhile, strength in the labor market, strong consumer spending, and low unemployment have contributed to the belief that the Fed is orchestrating a soft landing and sidestepping a recession.

These seven companies constitute a substantial portion of the S&P 500’s total market value, reflecting the increasing concentration of market power within the tech sector. As of 2024, these tech giants collectively comprise approximately 25% to 30% of the S&P 500, underscoring their outsized influence on the broader market.

The dominance of these tech behemoths has led to a significant skew in the S&P 500’s composition. With technology and tech-adjacent companies holding such a large share, the index’s performance has become heavily reliant on their fortunes. The Magnificent 7 are now often found within almost all large-cap growth and blend mutual funds and ETFs.

To offset this, we are adding to value-oriented positions, while limiting the addition of growth and tech funds so our portfolios are not overexposed to undue market risks. Strategically, we are “buying straw hats in winter.” From a historical basis, value stocks are cheaper than growth stocks. The Russell 1000 Value Index has a forward P/E of 15.3 compared to its long-term average (since 1997) of 14.1. Meanwhile, the Russell 1000 Growth Index has a forward P/E of 28.4 compared to its long-term average of 21.0.

Inflation: Some Good News, But Not Good Enough

US Core Inflation was 3.42% at the end of May. This is down from 3.61% the previous month, lower than the end-of-the-year rate of 3.93%, and well below the rate for May a year ago of 6.02%. However, this is still well above the Federal Reserve’s target of 2%.

The Federal Reserve has indicated that it may consider gradually lowering interest rates if inflation shows sustained signs of abating and economic conditions stabilize. They are walking a tightrope to slow economic growth enough that inflation will cool down but not too much that the economy will fall into a recession.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

https://plattwealthmanagement.com/

WE ARE HERE FOR YOU

The New Year provides many great opportunities to get a financial plan in place or reevaluate your risk profile. The Platt Wealth Management team is here for you to discuss any changes or new milestones in your life. We are always available to assist you with any financial matters and we look forward to continue to serve you along your financial journey.

Warmest regards,
Platt Wealth Management

The Fed and Interest Rates

As expected, the Fed left rates unchanged at the last policy meeting. According to Fed Chairman Powell, the Fed will continue to seek confirmation that inflation readings are moving toward the 2% Fed target. Inflation as measured by the Consumer Price Index was 0.4 percent in February and 3.2 percent over the past year. Core inflation, which leaves out volatile food and energy prices was also 0.4 percent for the month and 3.8 percent over the last year. While the trend is downward, inflation continues well above the target rate, thus leaving the Fed maintaining the current federal funds rate.

The Labor Market

The good news for the economy is that March employment data showed larger than expected job growth. Non-farm payrolls increased by 303,000, 50% more than the anticipated 200,000. As a result, unemployment fell to 3.8% from 3.9% previously and GDP grew by 2.5% in Q1. This is another factor underscoring why the Fed is not in a position to cut rates too soon.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

www.plattwm.com

There are only six Fed policy meetings left in 2024, so these projected rate cuts would have to start happening soon. The Fed meets again in May with another in June. A rate cut in May is off the table given the recent jobs report. The question is whether upcoming inflation data will cooperate and enable the Fed to initiate rate cuts.
At the end of last week, probabilities favored the first Fed rate cut occurring at the June Fed meeting, with a 75.6% probability, according to the CME FedWatch Tool.

The Magnificent Seven

At In 2023 the Magnificent Seven, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, as a group grew over 100% in 2023, significantly outperforming the S&P 500 index which rose 24%. These stocks had gains ranging from nearly 50% to well over 200%!

In movies the western genre has long since passed and comic book super heroes are the current standard bearer. So too with stocks, as the Magnificent Seven is no more and the latest and greatest is now the Fantastic Five. Dropping out of the group were Apple and Tesla, with declines of nearly 11% and almost 30%, respectively in Q1. The Fantastic Five were all positive, with four of them notching double digit gains just in the first quarter.

This meteoric rise in their valuations has pushed the concentration of the top ten stocks in S&P 500 to a 50-year high of 32%, as reported by JPMorgan. This concentration risk gives rise to quicker and deeper downward movements in the market should there be a reversal in momentum for these stocks.

WE ARE HERE FOR YOU

The New Year provides many great opportunities to get a financial plan in place or reevaluate your risk profile. The Platt Wealth Management team is here for you to discuss any changes or new milestones in your life. We are always available to assist you with any financial matters and we look forward to continue to serve you along your financial journey.

Warmest regards,
Platt Wealth Management

Markets Continue to be Resilient

For the third consecutive quarter stocks posted positive returns. The S&P 500 index was up 8.7% in Q2 and 16.9% in the first six months of the year. Market breadth is a concern, however, as the top 10 stocks in the S&P 500 accounted for over 95% of the index’s gains in the first half of the year.

Style divergence continued this past quarter. The Russell 1000 Growth index was up 12.8% in Q2 compared to a 4% gain for the Russell 1000 Value index. For the first half of the year their returns were 29% and 5.1%, respectively. Meanwhile, the small-cap index, the Russell 2000, posted a gain of 5.2% this past quarter and 8.1% through the first two quarters of 2023. Foreign markets were positive, too, although they lagged the S&P 500. The MSCI EAFE international index gained 3.2% in Q2 and is up 12.1% through the first half of the year. Emerging markets, as represented by the EAFE EM index, gained just over 1% in Q2 and 5.1% since the beginning of the year.

The Fed: Too Fast, Too Slow or Just Right?

For nearly the past one and a half years the Fed has raised rates ten times with four ¼ point increases, two ½ point increases and four ¾ point increases as they battle inflation. Inflation peaked in June of 2022 at 9.06%. It has declined in every month since then with an end of June rate of 3%, which is still above the Fed’s target of 2%. At the June meeting the Fed paused further rate increases but indicated two more increases are likely before the end of the year. The Fed continues to balance its efforts to control inflation without disrupting the US economy.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

https://plattwealthmanagement.com/

GDP growth went from 2.6% in Q4 2022 to a revised 2.0% in Q1 2023. This suggests the Fed’s rate hikes are cooling the economy and assisting in bringing down the rate of inflation. Unemployment, though, dropped 0.1% to 3.6%.

Increased rates and higher borrowing costs should slow the economy, eventually getting inflation down to the Fed target. The easier part of this task is completed, moving from slightly over 9% to a little over 3%. Moving from a 3% inflation rate to a 2% inflation rate will be more difficult. Positive job growth, although slowing, along with wages increasing, and a very low unemployment rate, will likely force the Fed to continue with rate increases.

Earnings season is upon us. Wall Street projects a 5% decline in earnings for the companies in the S&P 500. If these expectations are accurate a 10% correction would not come as a surprise. Short-term, risk-free treasuries are yielding over 5%. This is very tempting, not only for fixed-income investors, but for equity investors who are concerned with stock market volatility. They may believe the generous treasury numbers and an adjusted risk/reward ratio does not warrant additional equity exposure. However, long-term investors who build and maintain portfolio asset allocations appropriate for their time horizon and risk tolerance may still come out ahead in the long-run.

WE ARE HERE FOR YOU

The New Year provides many great opportunities to get a financial plan in place or reevaluate your risk profile. The Platt Wealth Management team is here for you to discuss any changes or new milestones in your life. We are always available to assist you with any financial matters and we look forward to continue to serve you along your financial journey.

Warmest regards,
Platt Wealth Management