S&P 500 UP 14%+

By Hightower Omaha on June 29, 2023

Just as I Predicted Last December!!!

June 29, 2023

In Catholic school as children, we were taught the difference between mortal and venial sins. The difference was readily understandable, even for children. Mortal sins would pretty much land you in hell and venial sins would slow your progress to heaven but weren’t show-stoppers. All sins could be forgiven, but I think my title may have given even the most understanding priest a moment of pause.

No, I didn’t predict the 14%+ six month return for stocks, and neither did anyone else. Not anyone! Even the raging bulls would whisper only 10%, and that was for the full year. I always offer 10% estimates for the prospective year’s returns. It has been a fairly reliable number, year in and year out, and best of all, almost no one remembers any of these January predictions by the following December. But I didn’t guess 10% for this year. I guessed flat. Even. And I thought I was being optimistic.

Rather than offer my litany of dour details that had me feeling so blue, let’s figure out what I and others missed. The answer is that I’m still not sure. My dour details were true and remain true. They are the guests who we’re sick of and who won’t leave, so we just do our best to ignore them. This damned recession should be upon us, but it’s not. I asked former Richmond Federal Reserve President Dr. Jeffrey Lacker why we hadn’t had a recession, and he said, “Because the Fed hasn’t raised rates far enough.” 

But the lack of recession isn’t reason alone for the surging stock market. Frankly, I’m not sure what is. Throughout 2022, brilliant strategists explained that higher interest rates were bad for tech companies, yet a handful of tech shares have been responsible for most of this year’s gains despite higher rates.   The seven largest companies in the S&P500, all widely considered to be tech companies, are up 86% on average year-to-date! Meanwhile, the other 493 companies in the S&P500, in aggregate, have barely moved this year. Solid, blue chip, defensive stocks outside of the tech sector have mostly languished. Why ignore these perfectly good companies, and why the tech pile-on? It wasn’t that money had nowhere else to go. It had 5% treasury-bills and suddenly tasty money market yields.

As you review your 7% or 8% returns for the first six months, do you chastise yourself or your manager or do you yell at the top of your lungs when you’re alone in your car and there aren’t other cars nearby to see you yelling like a crazy person? (I may have done it once or twice. NB It feels great!) The answer is that if your investment horizon was the six months ending this June 30, then you really messed up if you’re not up 14%+. BUT, if your horizon is longer-term, you have to wait and see. Over many years, stock market returns have lots of periods of inexplicable volatility that fade into reversions to the mean. I suspect this period will be seen in hindsight as having been aberrational. Moreover, I believe that those shares that have not participated in this stunning rally will have their day. As Warren Buffet likes to remind us, in the short run the market is a voting machine while in the long run, it is a weighing machine. Time will tell but we are finding many extraordinary companies that aren’t up 90% YTD.

Don’t get me wrong, I hate not being up 14%+, but I wouldn’t have been able to tolerate the risk necessary, and I didn’t need to take those risks. In fact, clients expect us to avoid unnecessary risks and keep them safe. More than ever, I believe in owning those individual companies that are well-managed, have fortress-like balance sheets, and are growing their bottom lines. Good investors don’t change disciplines to match market fads. Good investors adhere to time-tested disciplines through the fads so they may enjoy the benefit of hard-won lessons and solid long-term returns.

Peace,

Michael