January 2024
WHAT YOU NEED TO KNOW
The following facts and statistics describe the situation from November 1st to December 29th, 2023
The S&P 500 is up 13.5 percent for the months of November and December and is up 23.7 percent on the year.
The S&P 500 P/E ratio currently is at 26.19 (the historical average is 16).
The NASDAQ up 16.5 percent for the months of November and December and is up 42 percent on the year.
Many of these stocks currently are trading at a premium to major indices.
The Dow Jones Industrial Average was up 14 percent from for the months of November and December and is up 13.6 percent for the year.
RECENT STATISTICS AND ECONOMIC DATA THAT AFFECT INVESTMENT DECISIONS
The following statistics and data are important factors to consider when making investment decisions:
The Personal Consumption Expenditures (PCE) Price Index (an index favored by the Federal Reserve) is up 2.6 percent in November from one year ago -- a decrease of .3 percentage points from October and down 2.8 percent for the year.
According to ADP Employment 103,00 jobs were added in November with an annual pay increase of 5.6 percent. Nela Richardson, Chief Economist at ADP says, “Restaurants and hotels were the biggest job creators during the post-pandemic recovery. But that boost is behind us, and the return to trend in leisure and hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024.”
Job openings decreased by 6.5 percent from 9.35 million in September to 8.733 million in October.
The U.S. unemployment rate is 3.7 percent, a decrease of .2 percentage points from October’s 3.9 percent. The labor market remains robust
The Employment Cost Index-- Compensation costs increased 1.1 percent for civilian workers, seasonally adjusted, from June 2023 to September 2023. Over the year, total compensation rose 4.3 percent, wages and salaries rose 4.6 percent, and benefit costs rose 4.1 percent.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in November on a seasonally adjusted basis, after being unchanged in October, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.1 percent before seasonal adjustment.
Core CPI (excluding Food and Energy) is up 4.0 percent from the previous 12 months rising 0.3 percent in November, after rising 0.2 percent in October. Indexes which increased in November include rent, owners' equivalent rent, medical care, and motor vehicle insurance. The indexes for apparel, household furnishings and operations, communication, and recreation were among those that decreased over the month.
U.S. retail and food services sales for November 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $705.7 billion, up 0.3 percent from the previous month, and up 4.1 percent above November 2022. Total sales for the September 2023 through November 2023 period were up 3.4 percent from the same period a year ago.
The yield curve between the 2-year and 10-year Treasury Bonds currently is -.35 and currently has been in this range since the beginning of November. The last 6 recessions have happened after the 2-year and 10-year yield curve reversed and turned positive.
The Federal Reserve’s Balance Sheet currently shows $7.712 trillion in assets. The Fed’s Balance sheet was at its highest in April, 2022 at $8.965 trillion in assets. The Federal Reserve has removed 14 percent in liquidity, but still remains 84 percent elevated above its pre-pandemic assets.
QUESTION FOR CONSIDERATION
After the returns of the stock market last year, with the S&P 500 and Dow Jones Industrial Average at historic highs and the Nasdaq 7 percent below its all-time high, is there still room for stocks to appreciate, or should investors start looking for alternative assets?
THE BOTTOM LINE
Change is the only constant in the dynamic world of investments. Financial markets are ever-evolving as they respond to a multitude of factors ranging from economic indicators to geopolitical events. It is crucial for investors to recognize that there is always a reason to be invested and always a reason to be defensive. As an investment advisor I am consistently exploring the delicate balance between opportunity and risk, emphasizing the need for a thoughtful and sensibly active approach to investment management.
The perpetual dilemma is to balance opportunity and risks. Investing inherently involves a trade-off between potential returns and exposure to risk. Opportunities arise in the form of market upswings, emerging industries, and innovative technologies such as artificial intelligence and self-driving cars. Risks manifest themselves as market downturns, economic recessions, and unforeseen events that can disrupt the financial world. The key to successful investing lies in acknowledging that opportunity and risk are ever-present, necessitating a balanced strategy.
Capitalizing on market growth is one of the fundamental reasons to be invested. Historically, markets have shown a tendency to appreciate over the long term as a reflection of economic expansion, technological advancements, and population growth. During the last 90 years the S&P 500 index has averaged a 9 percent return per year. This has surpassed inflation that has averaged 3.5 percent per year during the same period. Innovations in various sectors -- such as technology, healthcare, and renewable energy -- provide ample opportunities for investors to participate in transformative trends that drive economic progress.
Certain investments, such as dividend-paying stocks and bonds, offer a reliable income stream. For investors who do not need short-term income from their portfolio, these investments provide the opportunity to reinvest and leverage the power of compounding interest. These income-generating assets can contribute to financial stability and enhance overall portfolio returns.
On the other hand, there always will be a reason to be defensive. Periods of heightened market volatility and corrections are inevitable. Being defensive involves implementing risk management strategies to protect capital during turbulent market conditions. Another reason to be defensive is geopolitical events -- such as trade tensions, conflicts, or policy changes -- that can have a significant impact on global markets. Defensive positioning involves reducing exposure to assets that are sensitive to geopolitical developments. An effective defensive strategy reallocates assets to more stable investments during economic downturns. It always is prudent to have defensive positions in stocks and government bonds as part of a portfolio.
It is important for investors to maintain a well-diversified portfolio that will serve as a strategic approach to managing risk and enhancing the potential for long-term financial stability. The fundamental principle behind diversification is to spread investments across various asset classes and industries to create a balanced mix that can help mitigate the impact of adverse market conditions on the overall portfolio.
The allure of quick profits and the fear of missing out (FOMO) can be powerful emotional drivers in the world of investing. It is not uncommon for investors to be tempted by the latest market trends or rallies, such as the "Santa Claus" rally of this past December, when hot stocks and speculative assets seem to generate rapid gains. However, succumbing to FOMO without careful consideration can lead to impulsive decisions and increased vulnerability to market volatility. An investor must consider short-term volatility versus long-term sustainability, fundamental analysis, valuation of the investment, and the demand for the investment’s goods or services. It is essential for investors to resist impulsive actions and instead adopt a long-term perspective.
There is no one-size-fits-all approach in the realm of investments. The perpetual ebb and flow of opportunity and risk underscore the need for a well-thought-out and adaptable investment strategy. Investors must remain vigilant, continuously assessing market conditions and adjusting their portfolios to strike the right balance between growth and protection.
Successful investment advisory requires a forward-looking mindset that acknowledges the inevitability of change and embraces the opportunity to navigate challenges. By understanding that there always is a reason to be invested and always a reason to be defensive, investors can position themselves to weather uncertainties and to capitalize on the ever-present potential for growth in the dynamic world of finance. —and that is The Long and Short of It!
Dane Krich