Staying The Course

June 14, 2023    |    Sage Capone

Investing ViewPoints for Hawaii Investors 

  • Federal Reserve: The Fed decided to hold off on an Interest Rate Hike
  • Bear or Bull Market: U.S. Equities and The Technology Stocks Rally
  • Top 10 Largest Companies: Performance Before and After 10 Years

Federal Reserve Update

The Federal Open Market Committee (FOMC) decided to hold off on an interest rate hike today to give the previous rate hikes a chance to work its way through the economy with the long and variable lags. The Feds next meeting is scheduled for July 25-26. The Fed’s borrowing target range is 5%-5.25%. The Fed’s dot plot which shows expectations for likely rate hikes in the future imply two more rate hikes with four remaining meetings scheduled for this year.

The policy moves by the Fed and recent data points such as the consumer and producer price index has shown that the rate of inflation is slowing. But as the FOMC is quick to note “inflation remains elevated.” Wages and prices are mismatched, and the Fed will continue using its tools for policy tightening with a reduction of assets on its balance sheet and potential interest rate increases.

U.S. Equities Technology Stock Rally

At the end of 2022, big tech companies conducted broad cost-cutting and headcount reductions to beat forecasts in 2023. U.S. Firms have thus far succeeded with that plan. Big Tech valued at over $200 billion continues to move the rally this year with positive earnings expectations strengthening those gains. The Top 8 Stocks presented in a graph by Yahoo Finance below includes (Apple, Amazon, Google, Facebook, Microsoft, Netflix, Nvidia and Tesla).

Source: Yahoo Finance

It’s important to note, the Top 8 Stocks do not predict the uptrend or downtrend trajectory of the market. The question on every investor’s mind would be the bull market versus bear market debate? To determine if we are in a bull market, we look at a few factors beneath the surface level. One of them would be market valuations and if stocks are at a level that can sustain a long upturn. Other factors would be market sentiment and broad participation of stocks and not just a few. When looking at the rally in the S&P 500, the average individual stock has risen by less than 3% year to date. As we know, nothing is black and white with investing, and the current factors may not illustrate a bull market in our eyes. The challenge is we have not seen a resurgence of growth with the broad economy dealing with rising rates, inflation, and credit contraction.

As I’ve said before, historically since 1928 every two out of three years U.S. Equities experience a drawdown of 10% or worse. Said another way, 95% of all years there is a drawdown of 5% or more. At Sage Financial Investments, we go through an investment plan that will withstand the assumptions of a bull market or a bear market. Remembering that our investment plan is tied to your short term and long-term goals. When we approach a managed portfolio it’s important to think long-term with your investment plan and go against your emotions when your allocations do not feel right in the short-term. Stay the course with your managed portfolio in all environments.

Performance of Top 10 Biggest Stocks

As a Hawaii Financial Advisor, I am approached by individuals trying to pick the winners looking to invest in a concentrated manner. The client who is a do it yourselfer investor looks for the outperforming stocks and wants to stay invested in these individual stocks solely. When I meet these clients, I quickly remind them of the historical performance of the top 10 stocks and how they may change over time and why it’s important to diversify. As you can see from the chart below, Dimensional Fund Advisors is illustrating the performance of a company before and after it joins the ranks of the top 10. The performance after joining is not what you would expect. The period of outperformance historically declines after the first year they become one of the 10 largest in the US.

Source: Dimensional Fund Advisors

In addition, I provide them this chart below showing the S&P 500 Top 10 Holdings since 1980. In this chart by Ben Carlson, you see that the companies quickly change over time. As an example, Ben Carlson writes that “General Electric (GE) was the biggest company in the S&P 500 until 2004. The stock has been cut in half since then.” This chart is helpful for clients who have concentrated portfolios and would like to reduce their risk of a drawdown with their individual positions.

Source: Ben Carlson 

As always, please do not hesitate to contact Sage Financial Investments for a Free Strategy Review or Second Opinion to discuss your portfolio or re-visit your risk profile.

*Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. Investments and/or investment strategies involve risk including the possible loss of principal. For a complete description of investment risks, fees and services, review the Brookstone Capital Management firm brochure (ADV Part 2A) which is available from your Investment Advisor Representative or by contacting Brookstone Capital Management.