After losing approximately 20% in 2022, last year the S&P 500 rose 24.2%, making
up for the prior year’s significant losses. During the last two months of 2023, even
bonds came back to erase a third straight year of losses. Technology led the way
after taking the brunt of the selling the prior year as only seven stocks accounted for roughly three quarters of the gains for the year.
Early in the quarter it became apparent that the Fed would lower interest rates into 2024, which opened up the opportunity for not only bonds (for the first time in three years) but also for a broadening out of stocks from dividend payers to smaller, more capital intensive companies. This allowed these underperformers to start to play catch-up after a long bout of underperformance. The best risk-to-reward, in fact, comes from these lesser known non-technology and communication names, especially since these two sectors rose 54-56% in 2023. While AI may prove to propel these companies further, just the fact of the law of large numbers, along with a very challenging regulatory environment, such outsized prior gains will no longer be sustainable. As the stock market rose to
new highs closing out 2023, we mentioned that the surge in valuations may borrow from gains early into the new year. The easy money has been made in these highflyers, and most investors are better off not chasing current valuations. Please keep in mind that only a select few are still attractive to accumulate, and only upon weakness for the long-term.
