The market has levels and quite often it’s seen from the surface. But to better understand what’s happening it’s helpful to look at the internals. So, let’s start with some numbers: As of 10/26/2023 (YCharts) 9.08% -4.81% .5% -1.81% -2.95% What do these numbers have in common? They are all Year to Date returns for various indexes. In order: SPY – S&P 500 index ETF IWM – Russell 2000 index ETF DIA – Dow Jones 30 index ETF MDY – S&P 500 Mid Cap Index RSP – S&P 500 Equal Weight index What can we learn from this? Well, the first observation I make is the difference between the RSP and the SPY. When the equal weight index trails the market weight index it means that a few large stocks are having an outsized effect and that the market is pretty narrow. A health market is not one in which the only participants are companies like Apple, Google, etc. This is reinforced by the fact that the broader market indexes such as the Mid Cap and the Russell 2000 (small cap) are actually negative on the year. Let’s now look at Price Earnings ratios. While this is not a perfect measure of potential performance, it is helpful to get a sense of comparison between the indexes. In order the P/E ratios for the indexes are: (YCharts) SPY - 21.62 IWM – 12.03 DIA – 21.12 MDY – 13.71 RSP – 17.76 So, what do we learn here? Basically, the indexes that haven’t performed well are selling at cheaper valuations (I eliminate the Dow Jones DIA because it is a price weighted index and not a market cap weighted index). To turn this around, the stocks that have been bought have been the more expensive stocks. And if you think about it in terms of rising interest rates this is even more bizarre. So, what can explain this dislocation? In my opinion this is simple – fear. Unless you believe that the growth rate of the largest 7 stocks in the S and P 500 will continually be greater than all other stocks in the indexes, you would – from a basic Warren Buffet valuation perspective – have to check out the companies in the other indexes. If I could buy a market level growth rate and pay less, why wouldn’t I? But fear changes this equation. It isn’t necessarily rational long term but when you can’t see down the road (and when you have lost a bit of faith actually) you just want out. And I believe that is what is happening now. As of this writing, 85% of stocks are below their 40-day moving average (Worden Bros charting). When this reaches 90% or more it traditionally has been a point when the fear index is a bit too stretched to the negative. It may take some time from here but – especially within certain sectors – fundamental price discounts are appearing. A final observation: GDP for Q3 was just announced at 4.9% and the Federal Reserve board, looking in the rear-view mirror as they do, frets about an economy too strong to rein in inflation. But the stock market is saying something different. The stock market looks forward. It is the window through which we might see the future. And while it is not always whispering to us correctly, I will take its signs more seriously as the wisdom of the market crowds is quite often better than packaged data provided in hindsight to the Federal reserve. The market says the economy is slowing down. Listening to conference calls the CEOs are hesitant to provide guidance. If you listen to the airlines in particular, they will tell you that passenger traffic is “normalizing” (i.e., pulling back from the surge we saw post Covid). I expect to hear similar stories when the retail stocks are announced. What to do now? Here is the weird thing. The time you want to buy stocks is when clarity is low, and pricing is good. When everyone sees only the slowdown you can research and find the companies that are finding ways to operate more efficiently and retaining their profits. This happens at every turn. Of course, you have to wait and be patient, but pricing dislocations will continue to show themselves over the next 6 months.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held Twin Gryphon Advisors, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results. Investment advisory services offered through Twin Gryphon Advisors, LLC, a registered investment advisor. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. Past performance does not guarantee future results.
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