QQQ - RSP: Happy 2024! Don't Make Decisions Based On A Day Or Two

2024-01-03 10:50:54 ET

Summary

• 2022 was a U.S. market train wreck.
• 2023 made it "a little" better, with a resounding rebound in the final two months of the year.
• I think 2024 will be the best year since 2021 for most stocks, rather than just a high-flying few.

2023 redeemed the mess that was 2022.

I believe 2024 will eclipse the memory of 2022 by adding to the gains of Q4 2023.

If you have already forgotten (or purposely erased from your memory) the year 2022, the S&P 500 (SP500) was down 19.4% that year. The Nasdaq 100-Index (NDX) was down 33%!

In 2023, the S&P was up 23.4%. Most people would think that means a profit over those two years. However, our members know better. They understand this math.

2022: $10,000 - $1,940 (19.4%) = $8,060.

2023: $8,060 + $2,420 (24.2%) = $10,480.

Over these two years, an investment in the S&P 500 would have earned a total of $480, less than the rate of inflation -- and this is only because of the bull-roaring gains of the 7 AI stocks that are the largest by market cap holdings of the S&P!

The news on the Nasdaq 100 front is a smidge better, thanks to the wild enthusiasm generated by generative AI:

2022: $10,000 - $3,300 (33%) = $6,700

2023: $6,700 + $3893 (58.1%) = $10,593.

In this case, an investor who held the Naz 100 over 2022 and 2023 would be up $593. Hardly worth it financially, but many market participants are in it for the adrenaline rush. They certainly got one in each of these years! "To everything there is a season..."

The Good News

The good news is that every indicator I use to consider the level of cash/MMF to keep versus security/ETF investment to make looks better now than it did at the beginning of 2023.

I try to stay ahead of investor sentiment, where we stand in the economic cycle, the valuation of available offerings, and the technical situation (particularly helpful when reviewing growth companies).

* Sentiment

* Economic Cycle

* Value

* Technical.

Sentiment is right where I like to see it, which is to say: it is not very strong. Many investors are still wary of the market. This is evidenced by the rush to income (not a bad decision if you can make 2-3%+ over the rate of coming-down inflation for an extended period.) It is also seen by the higher volume on down days than up, and on the immediate fear seen in the first gingerly step of 2024, as the Naz took a long-overdue dive.

The economic cycle looks just fine. Even the Fed has finally capitulated to the fact that inflation was declining much faster than their *trailing* indicators were showing. With intermediate ups and downs, the trend to lower rates is likely to continue.

This should unfreeze all those of us who refinanced our homes or bought anew and got as low as 2 & 3/8 percent mortgage loans. We might now want to downsize or join those homeowners fleeing from sanctuary cities or high-tax states like California, New York, and Illinois, but are unwilling to lose that good deal without a higher home price. As rates come down, the new housing market should pick up and existing housing will join in.

Wage inflation has two clear causes. If there are more job openings than there are willing workers, employers have to raise wages to attract more workers. That is how it works in most states that still believe in capitalism for all. In states that arbitrarily raise the minimum wage to the level where a robotic arm can do the same job as a human and do it twice as fast for half the ultimate "salary" before it must be replaced, we will see many layoffs. Those robotic arms give Adam Smith's "invisible hand" a whole new meaning -- and will mean less wage inflation.

Valuation remains the biggest fly in the ointment. There is a reason the Nasdaq is plunging right now. Investor enthusiasm simply got ahead of itself. I had trailing stops in any 2x or 3x leveraged ETFs that traded Nasdaq companies. Poof!! They are gone. But I am quite all right holding the unleveraged long ETFs on the Naz. Our most innovative companies are among the large caps traded there. In what I see as a fine 2024, these are good holds.

Yes, the markets will correct from time to time. Keep your eye on the prize. I believe there will be a rolling correction by industry and sector where some of the least popular sectors and industries, those that missed much of the 2023 fireworks, will quietly rise in the shadows while those that got ahead of themselves will still get 99% of the media attention.

The technical outlook will, I believe, depend upon how brief or long the large-cap darlings take to settle back a little.

We can always depend upon the fact that firms that create indexes will stress those that appeal the most to those investors who are most susceptible to animal spirits. One such, not content with just FANG, FAANG, or Magnificent 7, is ICE's "NYSE® FANG+® Index" ("NYFANG"). This index consists of just 10 stocks, each of which comprises 10% of this portfolio of 10. It is reconstituted quarterly, but my guess is there will be no interloper that unseats any of these unless Apple (AAPL) or Tesla (TSLA) take it on the chin in a very big way this year.

This area of technical analysis -- no charts, no complicated data, just looking at it with fresh eyes -- tells me that too many people are overlooking the next tier down of very successful companies that will do quite well in what I have dubbed a journeyman year of gains.

I say the next tier down because I do not see the Nasdaq 100 fulfilling the more aggressive prognostications of growth. Working our way down a bit into the Nasdaq Composite might offer some nice surprises from still-growing companies. A large number of those firms were down for the year 2023.

I review daily a model portfolio for our family of subscribers. In our Growth & Value Portfolio, I am quite happy to own the S&P 100 and Nasdaq 100 * equal-weighted* ETFs as well as the S&P 500 equal-weighted index that has done so very well for us in the past. But I do not wish to own only the highest-current-momentum already highly-priced Top 7 or Top 10 of anything.

My long-time decision to own the Invesco S&P 500® Equal Weight ETF ( RSP ) for some clients and for myself has meant a better value proposition. Our P/E ratio of securities held declined from a P/E of 23.78 for typical S&P 500 market-cap-weighted ETFs like SPY, IVV, and VOO to a closer-to-normal 20.1 for RSP. ("Normal" being, in recent decades, 18-22.)

The Invesco S&P 500® Equal Weight ETF (RSP)

I believe 2024 will be a far more egalitarian year, with considerably broader participation. Our Growth & Value Portfolio currently holds a number of ways to play this theme. One of them is our renewed ownership of RSP, which was my first buy of 2024.

Given my analysis of the primary indicators I research and follow, I want to dig down into the next 400 biggest companies (by market cap) in the USA. The best way to do that is to buy our old favorite once again in the Growth & Value Portfolio.

Here are the Top 10 holdings of a typical S&P 500 index fund:

All fine companies for the long term. Just, in my analysis, having gotten ahead of themselves of late -- as reflected in their elevated P/E ratios and high volume of trading.

Here are the Top 10 holdings of RSP:

These "top 10" will fluctuate, of course, since they are so close to each other at each quarterly rebalancing. As some pull away during the subsequent 3-month period after rebalancing back to "equal weighting" it might seem to some that it would only make sense to bet on these "winners." But the whole idea of equal weighting is that, just as often, those that pull ahead in such a short time do so because of some single factor: a good one-quarter earnings report, a tout from some big bank, etc.

Better to trust that these 500 companies represent an outsized contribution to the total capital invested in all companies and that all -- not just a cherished (and sometimes overbought!) few -- will do well in a good market environment.

I should make one final point as to why I am a little concerned about missing out on a single high-flyer that might keep flying or might crash to earth. Every one of these 500 companies is a well-established firm with real earnings and real weight in the economy of the United States.

Even the smallest company by market capitalization in the S&P 500 index is pretty big. Under Armour (UA), the sports apparel and footwear company that competes with the likes of Nike and Adidas, and has a market cap of $3.5 billion.

Good investing to all, and do not judge this year by a single day or a single week!

Unless you are a client of my portfolio management firm, Stanford Wealth Management, I do not know your personal financial situation. Therefore, I offer my opinions above for your due diligence, not as advice to buy or sell specific securities.

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