Between continued volatility in equity markets, an impending election, and ongoing concerns around interest rates, today’s financial world is more uncertain than ever. Most investors thought 2023 would end in the red, yet it defied expectations. The early months of 2024 kicked off with a bang, but what should investors expect as we near the summer months? Let’s dive in.
In the last two months of 2023, the S&P 500 had some of the best results we’ve seen in decades. In 2023, the S&P 500 ran 26% despite analyst projections, following an 18% fall in 2022. Over the last 10 years, the S&P 500 has annualized returns of approximately 12.1%, so despite volatility year to year, we’re optimistic about the market’s outlook going forward. In fact, within the first 61 trading days of 2024, the S&P 500 was up 10.2% — This is the 14th best starting quarter of the year since 1928!
Many clients ask us, “What’s been working, and where should I invest?” Last year, we saw growth stocks significantly outperform their counterparts. Large-cap growth stocks led the way ending with 11.4% returns, largely in part due to a group of stocks called “The Enormous Eight.” While this aligns with what we’ve seen in 10-year annualized returns, over the last decade, we’ve also seen strong performance from small-cap and mid-cap stocks as well, so it’s important to remain diversified across the various asset classes.
Source: Compustat, FactSet, Federal Reserve, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management.
Dividend yield is calculated as consensus estimates of dividends for the next 12 months, divided by most recent price, as provided by Compustat. Forward price-to-earnings ratio is a bottom-up calculation based on IBES estimates and FactSet estimates since January 2022. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns. Guide to the Markets - U.S. Data are as of March 31, 2024.
Coming into 2024, investors didn’t know what to expect. Few investors and analysts had high hopes for 2023’s market performance and we saw a massive run at year end. So, what have we seen so far?
Well, when we look at the market today (April 22, 2024), we’re nearing all-time highs in the S&P 500. The market has been running since late 2023, largely in part due to the performance of the Enormous Eight.
In 2023, the seven technology stocks that led the way for the S&P 500’s incredible performance were dubbed the “Magnificent Seven.” As we kicked off 2024, the addition of Netflix to these top performers became known as the “Enormous Eight”.
As of April 22, 2024, the S&P 500 is up 20.8% over the last 12 months. But the so-called Enormous Eight — Amazon, Apple, Google (Alphabet), Meta, Microsoft, Netflix, Nvidia and Tesla— have had incredible growth over the last 12 months.
As of April 22, 2024, the Enormous Eight’s performance over the last 12 months is as follows:
So, why not just invest in these eight companies? If we look back over the last 40 years, we’ll see that different companies have come and gone in the top spots dominating the S&P 500. Just because they are on top today, doesn’t mean they will stay there. Consider this – If we look at Tesla’s performance over the last 12 months, they were at their all-time highs in July of 2023 and fell 43% from that high by April 2024.
While it can be tempting to go all in on these top performers, past performance isn’t indicative of future results. We don’t expect to see continued high growth in the long term, and there is also the risk that some of these firms may be overvalued.
As we continue, we expect to see significant earnings growth to uphold the high prices for these stocks. Otherwise, if earnings and market expectations are misaligned, we could see downward pressure on the stocks instead.
Over the long term, we've seen large-cap growth and blend stocks outperform with 10-year annualized returns of 16.1% and 13% respectively. Historically over the last 60-80 years, small and mid-cap stocks have provided excess returns over large caps. However, in the last 10 years, large-cap stocks have outperformed with the rising success of technology companies. While past performance isn't indicative of future results, these historical results can provide an interesting lens for considering various investment strategies.
During election years, we often have clients asking if it’s time to get out of the market or change investments based on who’s in office. However, we’ve had good and bad markets under Republican and Democrat presidents, and we’ve had volatility during election years and the years that followed. S&P Global ran a study that looked at the S&P 500 from 1928-2021 and found that the average return during US election years was 11.57% and for the years after elections was 10.67%. What does this tell us? We shouldn’t be changing our investment strategy or pulling out of the market because of an election. It’s important to keep to our long-term strategy instead of making shortsighted choices in the face of uncertainty.
Many investors express concerns that valuations are expensive. By the end of March 2024, the S&P 500 had a forward price-to-earnings ratio of 20.96x. Something we’re watching closely is the quarterly earnings growth to see if we’ll have multiple expansions or an overstretched market. Going forward, we hope to see earnings growth on the S&P 500 that justifies the high multiples. If we don’t see that growth, we’ll start being concerned. Today’s price-to-earnings multiple is more than one standard deviation above the 20-year average of 16.62x, so we consider valuations more expensive than they’ve been in recent years.
Source: FactSet, FRB, Refinitiv Datastream, Robert Shiller, Standard and Poor’s, Thomson Reuters, J.P. Morgan Asset Management.
Price-to-earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months as provided by IBES since January 1999 and by FactSet since January 2022. Current next 12-months consensus earnings estimates are $245. Average P/E and standard deviations are calculated using 30 years of history. Shiller’s P/E uses trailing 10-years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as the next 12-months consensus dividend divided by most recent price. Price-to-book ratio is the price divided by book value per share. Price-to-cash flow is price divided by NTM cash flow. EY minus Baa yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) minus the Moody’s Baa seasoned corporate bond yield. Std. dev. over-/under-valued is calculated using the average and standard deviation over 30 years for each measure. *Averages and standard deviations for dividend yield and P/CF are since November 1995 due to data availability. Guide to the Markets – U.S. Data are as of March 31, 2024.
In 2023, large cap stocks led the way for market growth with over 26% returns for the year, followed closely by developed market equities (18.9% returns) and small cap stocks (16.9% returns). These leaders have carried on through the first quarter of 2024 with returns of 10.6%, 5.8%, and 5.2% respectively.
While it's important to avoid chasing what's run recently, it's also essential to understand what causes shifts among the various market sectors and asset classes.
Early in 2022, we believed international equities would be among the highest-performing asset classes. However, ongoing conflict in Russia, China, and Ukraine that year caused an almost 20% drop in Emerging Market Equities. Last year’s rebound in emerging market equities has carried over into the first quarter of 2024 where they’ve seen 2.2% returns as of March 31st, 2024, despite continued war in Russia, Ukraine, and Gaza.
Source: Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor’s, J.P. Morgan Asset Management.
Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Bloomberg Global HY Index, Fixed Income: Bloomberg US Aggregate, REITs: NAREIT Equity REIT Index, Cash: Bloomberg 1-3m Treasury. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Bloomberg US Aggregate, 5% in the Bloomberg 1-3m Treasury, 5% in the Bloomberg Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. Annualized (Ann.) return and volatility (Vol.) represents period from 12/31/2009 to 12/31/2023. Please see disclosure page at end for index definitions. All data represents total return for stated period. The “Asset Allocation” portfolio is for illustrative purposes only. Past performance is not indicative of future returns. Guide to the Markets – U.S. Data are as of March 31, 2024.
From a valuation perspective, as of March 31st, 2024, international equities' price-to-earnings ratio was around 13.7x while the U.S. remains closer to 20.9x – international equities are discounted by 34.5% comparatively! We hear that many people believe that international stocks consistently underperform compared to domestic equities; however, there are periods when U.S. equities underperform for years compared to international equities and vice versa. Take, for example, the period from 2003-2008: the S&P 500’s total return was about 49%, but the total return for the MSCI ACWI index for internationals was over 92%! What's essential to keep in mind is that what's worked recently may not work in the future.
Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.
Guide to the Markets – U.S. Data are as of March 31, 2024.
In June 2022, we reached 9% for headline CPI (levels we haven’t seen since the 1980s), before slowly declining in later months of the year and into 2023. As of February 2024, headline CPI dipped to 3.2%. However, ongoing high shelter and recreation costs are keeping core CPI higher than the Fed’s expectations as food and core goods’ prices have declined in recent months. With the Fed’s hawkish stance on interest rates, this is an area we’re keeping close watch over.
Following the near-zero interest rates in 2020, the Fed completed its first federal fund rate increase in early 2022. Since then, we saw the federal fund rate spike from 0%-0.25% in March of 2020 to over 5% in May 2023. This was the fastest-ever spike in the federal funds rates! The goal of these rate hikes is to fight persistently high inflation, but these rates impact everything from mortgage costs to savings accounts.
A question we’ve gotten from many of our clients lately is, “The Fed hasn’t raised rates since July, and inflation is down from last year, so shouldn’t rates come down soon?”
We don’t foresee rates coming down substantially anytime soon, however the market projects a 55% chance of a rate cut. But there’s a real chance we won’t get any. Market expectations also believe the Federal Funds Rate will drop to about 3.5% by the end of 2025. Upon the Fed’s decision to stop raising rates, whenever it may be, we’re optimistic that we’ll see the economy and stock market take off as we shift away from a “tightening” market.
Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management.
Market expectations are based off of USD Overnight Index Swaps. *Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Forecasts are not a reliable indicator of future performance. Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections or other forward-looking statements, actual events, results or performance may differ materially from those reflected or contemplated. Guide to the Markets – U.S. Data are as of March 31, 2024.
2022 was the worst year on record for bond performance with a negative return of 17.8%. But in 2023, much like with equities, we saw volatility and a year-end run-up in the bonds market, ending the year with a 6% return. So far this year, they’ve remained flat with less than a 1% return or fall by the end of the first quarter.
With the fast and drastic interest rate hikes we saw in 2022, many subclasses within fixed income got hurt. However, now we can look ahead to how fixed income may perform if we see interest rates stay where they are or begin to fall. The best predictor of bond returns over the next decade is the current yield, and today we’re seeing attractive yields in the fixed income market. For example, at the end of 2023, yields in the 30-year treasuries were 4%, investment-grade corporate bonds were 5%, and high-yield bonds were 7.5%! And this showcases the value for a diversified bond portfolio. One of the most common mistakes we see with clients is that they only invest in one type of bond fund!
Something we’re seeing today is attractive yields in the fixed income market. For example, as of September 30th, 2023, we’ve seen great yields in 30-year treasuries (4.9%), corporate bonds (5.5%), and high-yield bonds (9%). And this showcases the value for a diversified bond portfolio. One of the most common mistakes we see with clients is that they only invest in one type of bond fund!
We include bonds in the portfolio as a protective measure if we see another recessionary event like a COVID crisis or valuation bubble because they take on significantly lower risk than equities. Despite the short-term, where owning a 10-year bond in an inflationary period means you're losing a bit of money, over the long-term, we believe bonds can help to cushion portfolio returns and reduce risk by utilizing them in conjunction with a systematic target band rebalancing methodology.
It's essential to diversify your investments across equities, fixed income, and other asset classes since no one knows which asset classes will do well tomorrow.
Managing your exposure to risk is critical to ensuring that your investments work for you over time. As the market shifts and you move into various stages of your life, your asset allocation and investment strategy often need to evolve as well. We believe market volatility is becoming a new normal, so managing risk exposure is crucial. If you’re not keeping a close eye on your portfolio, you could be opening yourself up to overexposure in equities or missing buying opportunities.
Rather than becoming overwrought regarding financial issues and reacting frequently to market conditions, it’s important to know how your investment pieces fit together. Understanding their connections and taking a measured approach to your investment portfolio can be key factors in successfully preparing for retirement.
There are many factors involved in the shift from investing for growth to living off your investments. You want to get it right from the beginning. At Willis Johnson and Associates, we have years of experience helping our clients take emotion out of the equation and position them for a successful retirement. Get a second opinion from our experts, who have helped hundreds of energy executives develop the right asset allocation and investment strategy to transition into their retirement and beyond seamlessly.