The Market Broadens

My family got away for a short beach vacation last week. To my great disappointment, none of my three children enjoyed the sand and the surf.

They were thoroughly confused as to why the water seems to going both ways under their feet. Forward, then back to the sea. Forward, then back to the sea.

They’re all under 5, so I’m not worried. In time, I’ll have them trained to enjoy the ocean as much as I do!

They’re all under 5, so I’m not worried.

Fortunately, we weren’t locked into just the beach. There were plenty of pools to enjoy. They had several choices where to play.

Investors were also presented with more choices recently.

Since the lows in late 2022, the market has been largely running off artificial intelligence. Chat GPT was introduced around that time. And, remember, that was also a time, many forecasters were calling for a recession. The economy failed to deliver that weakness, so the AI story remained center stage. With it, the mega-cap tech stocks with AI stories were able to command a premium.

Since the lows in late 2022, the market has been largely running off artificial intelligence.

Another reason these tech companies soared: they were less immune to the Federal Reserve’s rate hikes. Just like wealthy households, these large, wealthy companies were less in need of borrowing money to fuel their growth. So, rate hikes pushed money towards these companies that may have gone to the rest of the market.

Now, that story may be changing a bit. The Fed seems poised to start reducing rates in September, as long as inflation continues to cool. That should mean reduced pressure for smaller companies in the market. And, more investor enthusiasm for their stocks. So, now those areas that have badly underperformed the market are starting to outperform.

You see that reflected in two areas of the market–Value stocks, shown below using the VTV index fund and small-caps, as reflected by the IWM index.

You see that reflected in two areas of the market–Value stocks, shown below using the VTV index fund and small-caps, as reflected by the IWM index.

This is great to see as a long-term investor. The rising market is more sustainable if more companies are in play. It’s only been a week, but this broadening is encouraging.

Right now, the market seems to be excited the Fed is able to cut rates into a strong economy. It supports the soft-landing narrative. Just a little re-tuning of rates and the economy can continue marching upward.

Yes, the unemployment rate has ticked up in recent months and jobless claims are on the rise as well. But, neither is showing recessionary warnings yet. They more closely resemble a normalization to the pre-Covid period. If the labor market deteriorates more rapidly, the Fed will likely be forced to cut more aggressively and the market’s views around those cuts will be likely be more pessimistic.

Yes, the unemployment rate has ticked up in recent months and jobless claims are on the rise as well.

But, for now, take the good news. The market broadening is making diversification feel good again and that’s a good thing. Too much return from too few companies tempts investors to throw caution to the wind and get too concentrated.

If that’s you, hopefully, this past week is helping to realign your thinking around the benefits of diversification.

Successful investing for most people I’ve talked with is simply this: achieving their financial goals with the least amount of stress possible.

Successful investing for most people I’ve talked with is simply this: achieving their financial goals with the least amount of stress possible.

That’s also our goal as we help guide our clients navigate their investment journey.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.