“You can’t connect the dots looking forward; you can only connect them looking backwards.” –Steve Jobs
During numerous discussions with clients in recent months, the notion of “all-time highs” has surfaced. Often, these highs are perceived as a harbinger of downturns. However, we believe the evidence points to a contrary conclusion.
In January we saw the S&P 500 achieve four all-time highs, surpassing the previous peak from January 2022. While this may seem like a relatively short time frame in the grand scheme of market history, enduring 512 days beneath the previous all-time high can be a challenge for investors – not only psychologically, but also in terms of their long-term compounding potential.
Since 2013, a period widely recognized as a great period for stocks in the U.S., the S&P 500 notched 351 all-time highs. These highs have occurred in varying frequencies, ranging from 70 in 2021 to just one in 2022, and none in 2023. This is in stark contrast to the period from 1930 to 1953, which saw no new highs at all. To put it differently, the all-time high from 1929 stood unchallenged until 1954. Could it be that the absence of all-time highs is the actual omen of tougher times ahead?
Our analysis, guided by a trend-following approach, suggests that trends, whether upward or downward, tend to persist. However, we acknowledge that there are moments when the phrase “but this time is different” holds true. During these times, we rely on trend data and predefined exit strategies to reduce exposure, allowing us to regroup and face the market anew.
But first, here’s a summary of our take on what transpired in the markets in January.
U.S. Equities
Exposure will increase and remain overweight. Trends over all timeframes are positive, and a small portion of exposure will be added from weaker emerging markets. Within U.S. equities, exposure will remain skewed toward growth and large caps. Value, mid, and small caps have retained uptrends over all timeframes but remain relatively weaker.
Intl Equities
Exposure will decrease and remain underweight. Foreign developed will not change from last month, but emerging market equities have resumed downtrends across both timeframes. The exposure vacated by EM will be handed up to U.S. equities.
Real Estate
Exposure will not change and is at its baseline allocation with uptrends across both timeframes.
U.S. & Intl Treasuries
Exposure will not change and is at its baseline allocation as uptrends persist across both timeframes.
Inflation-Protected Bonds
Exposure will not change due to the relative weakness of the asset class versus nominal Treasuries.
Alternatives
Exposure will not change. The baseline allocation for gold is also our highest limit, so we are already at the maximum allocation as trends in gold remain positive across both timeframes.
Short-Term Fixed Income
Exposure will not change and will remain with longer-duration fixed income instruments.
Asset Level Overview
Equities & Real Estate
As 2024 commenced, the S&P 500 Index followed in the footsteps of 2023, with the largest technology and growth companies rallying. The moves were enough to push the benchmark large-cap index to a new all-time high for the first time since the opening trading day of 2022. As was also customary during 2023, other segments of the market lagged: value, dividend, mid, and small caps. The latter two have struggled to hit positive territory as the month came to a close. For February, our portfolios will generally see a small increase to U.S. equities as it takes on exposure from weaker international equities, which is explained below.
Looking abroad, foreign equities have lagged their U.S. large-cap counterparts. In developed economies, monthly losses appear to be imminent. Emerging economies face an even bleaker picture, with ongoing economic challenges in China dragging down EM equity assets. In fact, allocations to emerging market equities in our portfolios will return to their minimum due to downtrends over all meaningful timeframes.
Real estate securities paused their rally, coinciding with talk of peak interest rates, while declining for the first time since October. Despite some losses in January, the overall picture for the asset class has not changed, as the upward trend continued. However, another month of declines could be enough to move allocations from baseline to underweight.
Fixed Income & Alternatives
Like real estate, fixed income generally experienced retracements in January, as market sentiment about the timing of rate decreases shifted out a bit further. From a price perspective, the short end of the yield curve remained the strongest, while longer-duration bonds showed relative weakness. International Treasuries and inflation-protected bonds performed virtually in lockstep. While allocations in our portfolios remain unchanged, trends in the coming months could easily shift, especially for longer-duration bonds.
Gold, like most assets outside of U.S. large-cap equities, saw a decline in prices during January, but trends continue to be positive as the month ends. As a result, exposure in our portfolios will not change and will remain at the baseline allocation.
Sourcing for this section:
Barchart.com, S&P 500 Index ($SPX), 1/1/1980 to 12/26/2023; Barchart.com, Dow Jones U.S. Index ($DUSA), 8/1/2006 to 12/26/2023; Barchart.com, Nasdaq QQQ Invesco ETF (QQQ), 3/1/1999 to 12/26/2023; Barchart.com, “China Largecap Ishares ETF (FXI), 1/1/2023 to 12/26/2023; Barchart.com, 20+ Year Treas Bond Ishares ETF (TLT), 10/1/2023 to 12/26/2023; and Barchart.com, Gold Trust Ishares (IAU), 1/1/2023 to 12/26/2023
3 Potential Catalysts for Trend Changes
Strong GDP:
In 2023, the recession forecasted by many economists never showed up, thanks to the determined efforts of American consumers. During the past year, the U.S. economy grew 3.1%, encompassing a seasonally- and inflation-adjusted growth rate of 3.3% in Q4. A resilient labor market supported strong consumer spending and helped avert a downturn.
Labor Supply/Demand:
The workforce saw an influx of workers returning from the sidelines in both 2022 and 2023, which eased labor shortages and put downward pressure on wage growth. However, additional gains may be difficult to achieve. This is important because inflation remains above the Fed’s 2% target, even though we saw a major retreat last year. The participation rate, which is the share of Americans who are in the labor force, has essentially held steady since August. If labor supply does not increase, the fight against inflation might require an easing of demand or weaker growth.
Credit Issues:
Consumers are putting more purchases on credit cards and taking longer to pay them off. In 2023, the four largest U.S. banks reported higher levels of credit card spending compared to the prior year. Unpaid balances surpassed 2019 levels for the first time, an indication that consumers are putting more on their credit cards and taking longer to pay off their bills prior to the pandemic. Additionally, delinquency rates have continued to slowly rise since 2021.
Consistency Compounds
“Plans are nothing; planning is everything.” –Dwight D. Eisenhower
As January unfolds, it’s the season for resolutions and setting goals, a tradition that extends to Strategic Advisory Partners. However, our approach to this practice is not born out of frustration over unmet expectations. It is part of a thoughtful, systematic process for running our business and delivering value to our clients.
The methodical approach our firm takes toward achieving goals aligns with one of the sayings we use frequently: “It’s better to be consistently good than occasionally great.”
This saying can take on a variety of applications, but one meaning we favor is that achieving small, cumulative gains through persistent execution is superior to seeking shortcuts to success. In other words, we prefer designing straightforward, repeatable processes that can be consistently implemented by all team members across all circumstances, valuing simplicity over complexity.
So how does this relate to the markets and client portfolios? We believe it manifests in the long-term benefits of our systematic allocation decisions.
Meb Faber, a fellow trend follower, recently highlighted an intriguing trend difference between U.S. and international equities on Twitter. To paraphrase, since 1950, most of the outperformance of U.S. equities over their global counterparts has occurred since 2009.
Strategic Advisory Partners’ portfolios have historically favored U.S. equities over international ones. The performance benefits created by these deployments of capital are minor when evaluated over 30 days and are even harder to spot when one mistakenly compares the portfolio’s performance to an incorrect benchmark, such as the S&P 500 or Dow Jones Index. Consistently favoring U.S. equities over the long haul, we believe, has allowed us to steadily accrue these gains, which can significantly compound over time.
These rewards are generated in a dispassionate and unemotional manner, offering comfort to our clients, who are trying to reach their goals without any knowledge of what the next 30-40 years will look like (or even the next 12 months).
In our experience, shooting for “consistently good” rather than “occasionally great” has served Strategic Advisory Partners well over the years. Our resolution is to continue consistently executing the systems that have gotten us to this point, while looking for ways to expand systematic thinking into new areas that serve our clients.
Disclosures:
Strategic Advisory Partners is an investment advisor registered pursuant to the laws of the state of North Carolina. Our firm only conducts business in states where licensed, registered, or where an applicable exemption or exclusion is afforded. This material should not be considered a solicitation to buy or an offer to sell securities or financial services. The investment advisory services of Strategic Advisory Partners are not available in those states where our firm is not authorized or permitted by law to solicit or sell advisory services and products. Registration as an investment adviser does not imply any level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information, please visit adviserinfo.sec.gov and search for our firm name.
Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.
Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.
Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Strategic Advisory Partners.
An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
