Key Events: Economic data still playing catch-up
The extended US Government shutdown during October and November has created an uneven data recovery period with some economic data from September and October trickling in while some key November data is being released simultaneously. Last week, ISM Manufacturing continued to slide, while the ISM Services data expanded at its fastest pace since February1. ADP’s November employment data was weak, yet consumer sentiment showed modest improvement. The mixed data for the week was capped by in-line PCE inflation data on Friday that should be tame enough for another Fed cut.
Market Review: Equities advance to kick-off December
Stock indices finished higher for the week. Emerging markets led followed by small-caps.
The aggregate bond index fell as Treasury yields rose by 12 basis points.
Outlook: Maintain diversification to mitigate risk
The last 36 months have provided very healthy returns for equity market investors, especially those inclined to concentrate their holdings in the largest market caps. The first chart shows that the cap weighted S&P 500 has advanced by 78.9% since December of 2022. This is well above the other three indices shown: MSCI ACWI ex-US (up 46.8%), Russell 2500 (up 41.7%) and the S&P Equal-Weight (up 35.2%). The key difference was the performance of the Mag-7 stocks, which increased an extreme 330% and pulled the overall S&P northward.
We have previously highlighted valuation and concentration risk present within the S&P 500. The second chart details the risk of historical performance extremes as shown by HB Wealth Gina Martin Adams (formerly of Bloomberg).2
During the month of September, trailing 3-year returns for the S&P 500 nearly reached 2 standard deviations above normal3. As the chart suggests, trailing 36-month returns in the categories above 1 standard deviation relative to history tend to be lackluster compared to other starting points. This highlights the risk of maintaining portfolio concentration that is too highly exposed to the largest market caps. High valuations and high concentration only add to the risk profile.
Compounding reasonable returns from equities over the intermediate term can still prove to be achievable even though trailing returns from the S&P 500 have been so exceptional. A diversified approach that includes healthy allocations to international equities, small and mid-cap companies, as well as complimentary value exposure may be a necessary recipe to reach that outcome. We would encourage investors to maintain discipline and adherence to principles of diversification.
Portfolio Diversification Becomes Essential Following Strong Multi-Year Performance
This material is intended to be educational in nature , and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. OneAscent can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
Source: Bloomberg economic data.
Source: HB Wealth Strategist Gina Martin Adams research as shared on Linked-In.
Source: HB Wealth Strategist Gina Martin Adams research as shared on Linked-In.
Market Returns reference the following indices: Large Cap – S&P 500, Mid Cap Growth – Russell Midcap growth, Mid Cap Value – Russell Midcap Value, Small Cap – Russell 2000, Developed – MSCI EAFE, Emerging – MSCI Emerging Markets, Aggregate – Bloomberg US Aggregate, High Yield – Bloomberg High Yield
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