Fight the Fed – A Raw 2024 Investment Reality Check

Posted by David Nelson, CFA on November 27, 2023 in Investment Management | Leave a comment

• Myth of the Elite 7 – Mega cap stocks were not the only path to success
• Challenging the Status Quo – Over-reliance on traditional investment mantras, in particular conventional wisdom surrounding the Federal Reserve has been an investment loser
• Reality Check – Lightning rarely strikes in the same place twice. Look outside the popular favorites for new themes as we head into 2024
• The Price Tag for Downside Protection – Protecting the downside often means lagging the upside

By David Nelson, CFA CMT

As 2023 comes to a close, it is time for a raw, no-holds-barred reflection on the investment battlefield. We run the year through our heads and ask ourselves what we could have done different, better, or maybe what we shouldn’t have done at all.

Let’s be honest. We spent too much of the year hostage to the Federal Reserve hanging on every word out of Jay Powell. “Don’t fight the Fed! That’s been the rallying cry all year.

Well, those who fought the Fed? They won. Let’s stop pedaling the same old market mantras that are about as reliable as the weather. Yes, the broad macro matters and maybe affects our positioning around the edges, but in the end, it is a market of stocks with individual stories, fundamentals, and management teams.

What worked, what didn’t, and what’s next? Those are the questions we have to answer.

Bloomberg Data

We all watched this year as the Magnificent 7 stocks carried the broad indices back up close to a 52-week high and within ear shot of an all-time high.  Fabulous companies all, but difficult to concentrate all your capital into just a handful of relatively expensive companies.

But was that the only path forward? Let’s find out!

You know the names. AAPL, MSFT, GOOGL, AMZN, META, NVDA and TSLA.

Investors hid behind the belief that any underperformance was because market returns were so narrow. How could we possibly be expected to keep up?

To that end, a lot of long strategies did fail to keep up. Those who had a short bias. They had their heads handed to them. Even a lot of market timing strategies and tactical strategies struggled to deliver competitive returns. There are always exceptions and of course some did outperform.

Truth is a bitch

We can no longer hide behind the Elite 7 and blame our returns on the monster outperformance of these fabulous companies.

Do the math

S&P 500 Top Performers

Bloomberg Data

25% of the S&P 500 is up more than the index this year. That’s more than 125 companies with better than 20% returns. 60% of the index is positive year to date.

Russell 2000 Top Performers

Bloomberg Data

Even in the maligned Russell 2000, which is not having a great year at the index level, has some big winners. 17 are up better than Nvidia (NVDA.) More than 500 beat the S&P 500.

The cost of insurance

Downside protection always comes with a price tag. Using strategies that protect the downside almost always means you will lag the upside. There is nothing wrong with that. Constructing a portfolio that keeps you in the game is better than not playing the game at all. Just be honest about your returns and don’t pass the blame onto a handful of stocks you may not own.

Forced to Cut

Bloomberg Data

I said earlier we spend too much time worrying about the Federal Reserve and the macro challenges we face almost every year. We worry about the Fed because they have a propensity to make mistakes. I get it. Just about every recession was on the heels of a federal reserve tightening too far into the cycle or failing to anticipate a recession on their doorstep.

Hell to Pay

This last run up in this market is the realization that the Fed is done. I’ll say it once again. We can debate the timing of a cut. We can even debate that there will be a cut. But what isn’t up for debate is that the Fed is done and if they aren’t, there will be hell to pay.

WIRP

Bloomberg Data

The year ahead

I’m not going to attempt to give you a year-end target. It’s a fool’s game and almost always wrong. All of the bulge bracket firms will adjust their targets as the year comes to a close and miraculously get it right by Christmas.

Look beyond the Magnificent 7

There are too many stories and opportunities to ignore. We’ve already shown that you could have beaten the market even if you didn’t own any of these stocks. Yes, it was easier with them but not impossible.

Lightning rarely strikes twice, and we could easily see some profit taking after the year end. Remember last year. Some of the biggest losers in January were last year’s winners.

As we closed out 2022 a lot of this year’s winners were for sale. Most were down hard on the year. You couldn’t sell enough Microsoft to keep your head above water. I suspect investors with big profits in large cap secular growth that need to cash in will likely wait till after the start of the new year. How much they decide to sell could set the tone for January and beyond. 

*At the time of this article some funds managed by David were long AAPL, MSFT, GOOGL, META and AMZN