Market commentators are all abuzz about the phenomenal performance of the S&P 500. This year the market has reached 56 new all-time highs. We are on track for the S&P 500 to produce two consecutive years of over 20% returns for the first time since 1998. It was up +26.1% in 2023 and so far is up +28.1% this year. The last time this happened was in 1998 and over the last 75 years there were only 8 other times when stocks jumped 20%+ for two years in a row; the index finished positive in six of the following years and fell only in 1977 and 2000.
Also, the S&P 500 price-to-book ratio is at the highest level since March 2000, the peak of the Dot Com Bubble. Another interesting tidbit; whenever the S&P 500 has been in a bull market this long at 26 months, it has always persisted, sometimes years, longer!
Finally, let’s not forget the rest of the world’s capital markets. The U.S. is historically “rich” compared to the rest of the world trading at 22x forward earning versus 14x for international stocks; the largest gap in history!
Nothing more needs to be said about how strong the S&P 500 has been the last two years! Looking into the component stocks, we see the “Magnificent 7” (Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, and Netflix) who have led the charge with an outsized +55% total return this YTD and +126% over the last 2 years (see chart below, red line for Magnificent 7 compared to blue line S&P 500 (IVV). Other lesser known names like Palantir, Vistra, Texas Pacific, and Axon Enterprises are all up over +145%!
What could cause the market to selloff? Maybe turmoil in the bond market, but certainly the bond market has been well-behaved so far this year. After all, year-to-date core bonds (AGG) are up +3.1% and high yield bonds (HYG), one of the supposedly riskiest fixed income sectors, has done phenomenally well being up +9.0% due to a large narrowing of credit spreads to almost historic lows. Shorter bonds (NEAR), with less interest rate risk, are up about 5.0% YTD.
Other things that could derail the market are a spike up in inflation, geopolitical turmoil, an oil supply shock, or an “unknown unknown” (a “black swan” event). We shall see!
In the meantime, D&A is sticking with its long-term strategic approach managing client accounts to their customized strategies targeted to their risk profile, time horizon, and their special considerations. We still mostly prefer globally-diversified portfolios of low-cost passive exchange-traded funds (ETFs) suited to those needs. As I am wont to say when someone asks me what the market will do; I say “Beats Me!”
While markets remain unpredictable, D&A’s focus on disciplined, long-term strategies ensures our clients stay well-positioned, no matter what lies ahead.