Multiple Stock Market Indices Set New All-Time Highs in January

  • The S&P 500 Index gained +1.6% in January, while the Russell 2000 Index traded down by -3.9%. Five of the eleven S&P 500 sectors traded higher. Communication Services, Financials, and Health Care each outperformed the S&P 500, while Real Estate, Consumer Discretionary, and Materials traded lower.
  • Corporate investment-grade bonds produced a -0.4% total return as Treasury yields rose, slightly underperforming corporate high-yield’s +0.1% total return.
  • International stocks traded lower and underperformed U.S. stocks. The MSCI EAFE Index of developed market stocks returned -0.5%, while the MSCI Emerging Market Index traded lower by -4.5%.

Stocks traded higher to start the new year, with the S&P 500, NASDAQ 100, and Dow Jones Industrial Average each setting new all-time highs. In continuation of last year’s trend, the companies with the biggest market caps accounted for a substantial portion of the early-year gains. This leadership can be seen in the January returns of various factors, including the Russell 1000 Growth’s +2.4% return and the NASDAQ 100’s +1.8% return. In contrast, smaller companies traded lower, with the Russell 2000 underperforming the S&P 500 by -5.5%. Bonds produced flat returns after a robust Q4, when Treasury yields fell in anticipation of rate cuts by the Federal Reserve. When could the first interest rate cut arrive? The section below provides an update on monetary policy after the Federal Reserve’s January meeting.

The Federal Reserve held interest rates steady at its January meeting and hinted that rate hikes are finished for the current tightening cycle. While both actions were expected, the post-meeting statement confused the market. The central bank stated that it wants further confirmation that inflation will return to the 2% target before cutting interest rates. Investors were surprised by the statement after seeing inflationary pressures ease over the past six months and assuming interest rates didn’t need to stay at current levels. What more does the Fed want to see? Fed Chair Powell wasn’t clear, although he reiterated that inflation is moving in the right direction.

The future path of interest rates remains uncertain after the January meeting and press conference. The Fed’s statement provides it with maximum flexibility to adjust monetary policy as needed, cutting rates if inflation continues lower but keeping rates at current levels if inflation proves stickier than expected. What is clear is the Fed’s desire to cut interest rates this year as a proactive measure to support the economy. It’s simply a question of when and by how much the central bank will cut interest rates. Investors and economists have been anxiously awaiting the Fed’s next steps, but it appears they will be waiting for at least a few more months.

Important Notices & Disclaimer

S&P 500 Registers its Biggest Monthly Gain Since July 2022

  • The S&P 500 Index gained +9.1% in November, slightly underperforming the Russell 2000 Index’s +9.2% return. Ten of the eleven S&P 500 sectors traded higher, with only Energy trading lower as the price of oil declined -6.2%.
  • Corporate investment-grade bonds produced a +7.5% total return as yields declined, outperforming corporate high-yield bonds’ +4.9% total return.
  • International stocks underperformed U.S. stocks for a second consecutive month. The MSCI EAFE Index of developed market stocks gained +8.2% and outperformed the MSCI Emerging Market Index’s +7.8% return.

The big story during November was the decline in Treasury yields. The bond market experienced large moves in interest rates, with the 10-year Treasury yield falling to 4.36% from over 5% in October. For context, the -0.54% decline in the 10-year yield ranks among the biggest 1-month drops since December 2008, when the Federal Reserve cut interest rates by -0.75%. Falling Treasury yields provided relief to bonds, which have traded lower as the Federal Reserve hikes rates. The Bloomberg U.S. Bond Aggregate Index, which tracks a broad index of U.S. bonds, produced a +4.6% total return. It was the index’s first gain in seven months and its biggest gain since 1985.

The decline in yields helped the stock market rebound after trading lower for three consecutive months. The S&P 500 recorded its biggest monthly gain since July 2022 and currently trades less than 5% below its all-time closing high. The NASDAQ 100 Index gained +10.8% as mega-cap growth stocks such as Microsoft, Apple, and NVIDIA traded toward new all-time highs. Technology was the top-performing S&P 500 sector as the rally in growth stocks propelled the sector to a new all-time high. Real Estate followed close behind, benefiting from falling interest rates that provided relief to property owners. Defensive sectors, including Consumer Staples, Utilities, and Health Care, lagged as the market traded higher.

Investors are optimistic as the U.S. economy continues to exceed expectations. Third-quarter GDP growth was recently revised higher to 5.2%, the strongest since Q4 2021. While unemployment sits at a 21-month high of 3.9%, it remains low by historical standards. The pending home sales index recently fell to the lowest level since 2001, but the decline appears to be linked to limited supply rather than weak demand. The S&P 500’s earnings grew year-over-year during the third quarter, the first time since Q3 2022. Inflation pressures have eased significantly, and investors expect multiple interest rate cuts in 2024. There is a growing sense that the Federal Reserve has accomplished its mission of lowering inflation without tipping the economy into a recession. The market will be watching closely to see if the strength carries into 2024.

Important Notices & Disclaimer

The S&P 500’s Concentration Offers a Lesson on Diversification

The odds are high that you have read or heard about artificial intelligence or Chat GPT this year. In the stock market, there is a small group of stocks known as the “7 Tech Titans”, which includes leading technology firms exposed to the AI theme. The group of stocks has significantly outperformed this year due to growing excitement about AI, which has in turn increased its weight in the S&P 500. The five largest companies in the S&P 500, which are all part of the 7 Tech Titans, account for 22% of the entire index’s total market capitalization. These five companies include Apple, Microsoft, Amazon, NVIDIA, and Alphabet (the parent company of Google).

The S&P 500 is now highly concentrated, surpassing the previous record set in December 1999. In that era, Microsoft, General Electric, Cisco, Walmart, and Intel collectively represented around 19% of the S&P 500. How have those five stocks fared since 2000? Figure 1 shows their combined weight in the S&P 500 has declined over time, while the weight of today’s five largest stocks has steadily increased. Figure 2 shows the five stocks have produced an average total return of 216% since 2000, compared to the S&P 500’s return of 349%. At an individual stock level, only one out of the five stocks managed to outperform the S&P 500 over the past two decades.

The two charts highlight the importance of diversification. In both instances, the high concentration resulted from the outperformance of a small group of stocks. However, the return data in Figure 2 shows that today’s winners are not necessarily tomorrow’s winners. Diversifying your stock holdings across different sectors and companies can help manage this risk. It’s also important to diversify across bonds, real estate, and other asset classes, as well as regularly rebalance your portfolio to avoid concentration risk like the S&P 500. Financial markets are constantly changing, and owning a portfolio that is diversified across asset classes can help smooth returns over time and decrease overall portfolio risk. Our goal is to help you create a well-balanced investment portfolio that aligns with your financial goals and risk tolerance.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

Why Interest Rates Could Remain High Heading Into 2024

The current economic environment is drawing comparisons to the 1970s. In the early 1970s, oil prices surged following OPEC’s oil embargo, and U.S. fiscal deficits expanded as government spending increased. Today, oil prices are elevated due to supply concerns, and fiscal deficits are expanding as the government invests in infrastructure improvements and renewable energy. While the 1970s and today share rising oil prices and budget deficits, the most direct link between the two periods is high inflation, as shown in Figure 1 below.

The chart compares the path of inflation during the 1970s and today. The numbers differ, but a similar pattern emerges. In both periods, inflationary pressures began building early when interest rates were low in the 1960s and 2010s, respectively. Inflation subsequently eased as economic activity slowed around the 1970 recession and the 2020 COVID pandemic. However, inflation later reversed higher in both periods, with oil prices spiking in the early 1970s and supply chain disruptions following the 2020 pandemic. In both instances, the Fed responded by aggressively raising interest rates, causing inflation pressures to ease.

However, the 1970s serve as a cautionary tale, as inflation reaccelerated to over 13% by the end of the decade. The rapid rise in inflation prompted the Fed to take drastic action and raise the federal funds rate to a staggering 20% in early 1980. An inflation resurgence like the late 1970s is the primary risk today, which is why the Fed is hesitant to declare victory despite the recent dip in inflation. The Fed’s fear is that the economy will re-accelerate and inflation will run away like in the late 1970s. While this is not necessarily the Fed’s forecast, it is widely discussed as a potential risk. The Fed is determined to avoid repeating its errors from the 1970s. The implication is that the Fed may decide to keep interest rates higher for longer, which could keep the cost of capital high in the coming years. Consumers may find it more expensive to buy homes and vehicles or refinance their existing mortgages. Likewise, businesses may find it more expensive to fund operations, finance inventory, and reinvest in their business. Given this uncertainty, it is wise to take a long-term perspective when dealing with interest rates. Borrowers can put themselves in a difficult position if they take out a loan with the expectation of refinancing, only to find that rates remain high.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

Navigating the Changing Landscape of Income Generation: Bonds vs. Stocks

Investors can earn income in one of two primary ways – dividends paid on stocks or interest paid on bonds. While both generate income, stocks and bonds have remarkably different risk profiles. Stocks tend to be more volatile than bonds because stocks are more sensitive to the state of the economy and changes in a company’s financial performance. Stocks also face a higher degree of income uncertainty since companies may choose, but are not obligated, to pay dividends to shareholders. In contrast, borrowers are contractually required to pay interest on their bonds at specified intervals. Bondholders also rank more senior in a company’s capital structure and are typically paid back before stockholders if a company declares bankruptcy. While bonds tend to produce lower price returns, their contractual interest payments and seniority may make them a less risky income source.

The last decade of low interest rates made it difficult for savers to generate income. If savers wanted to earn more income than bonds offered, they turned to the stock market. Figure 1 below tracks the number of S&P 500 companies with a dividend yield above the yield on a 5-year Treasury bond. From 2008 through 2022, many S&P 500 companies offered higher yields than the 5-year Treasury bond. However, the situation changed considerably during the past 12 months as interest rates rose. As of July 11th, only 51 companies in the S&P 500 paid a dividend yield above the yield on a 5-year Treasury bond. It is the fewest companies since 2007, a period when savers could generate more income by owning bonds rather than stocks.

Bonds sold off in 2022 as the Federal Reserve raised interest rates, but those interest rate hikes now present an opportunity for savers. Figure 2, which graphs the yield across various U.S. Treasury maturities, shows bonds are now more competitive as an income source. Yields on shorter maturity Treasuries approach 5.5%, and investors can lock in a yield near 4% on longer maturity Treasuries. Rather than relying on stocks to generate income, savers can now earn a higher level of income by owning bonds and diversifying their portfolio.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.