I can’t speak for Santa, but Fed Chair Jerome Powell had this to say mid-month after the latest Fed policy meeting. “I think it’s really good to see the progress that we’re making. If you look at the ... six-month measures, you see very low numbers.”
That’s right, what you read was optimism. That tone, coupled with rate-cut projections for 2024 and whatever contribution Santa made, sent the market soaring.
The Nasdaq is now on pace for its best year since 1999. Well and good. But if you zoom out just a little bit and look at the performance of the index over the past two years, you’ll see quite a different story.
And the S&P 500? A closer shave. On December 28, 2021, it closed at 4,786. Two years later (yesterday), it closed at 4,783. That’s three points shy of breakeven and about as close to a zero return as you can get. If you bought the S&P 500 around Christmas 2021, you’d be flat today but for the smallish dividend from an ETF like SPY.
The Year of Artificial Intelligence
An interesting side note to this. The equal-weight S&P 500 index (invests capital equally into all of the constituents in that portfolio) is up 12% for the year. Still good, but only half the return of the market cap-weight S&P 500 index. Cap-weight indices pour more capital into the constituents with a higher market cap and are thereby influenced more by the performance of those larger companies.
And what “larger companies” are we talking about that so influenced the S&P? You guessed it: the Magnificent Seven - Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla.
Coincidently, these companies are all on the cutting edge of the artificial intelligence (AI) revolution, or at least the commercialization of that revolution. So, the strong performance over the past 12 months of both the S&P 500 and the Nasdaq were driven largely by investor interest in AI.
How Did The Strategies Do?
But for Global Trader, the strategies are closing out 2023 with gains. We’ve been fortunate. Here’s the rundown on YTD performance for all the strategies through December 29:
So How Is 2024 Shaping Up?
A glance at the business headlines three days before the New Year says it all.
- JP Morgan Chief Jamie Dimon on the Dire State of the Global Economy – Bloomberg
- It’s okay to be optimistic about the economy next year – Vox
- Why the so-called soft landing is just the calm before the storm – Financial Post
- Why 2024 will be a ‘surprisingly good year’ for stocks – Yahoo Finance
Then again, perhaps the headlines say nothing at all. Good grief.
I’m going to focus on one analyst in particular; the one - among all the strategists tracked by Bloomberg - who had the most accurate stock market outlook for 2023, while almost everyone else was bearish. That would be Fundstrat's Tom Lee. A year ago, Lee said the S&P 500 would end 2023 at 4,750, which is within 1% of its current level.
One of the few bulls on Wall Street last year, Lee is once again expecting a solid year ahead for the stock market, with a S&P 500 price target of 5,200 for the end of 2024, representing potential upside of 9% from current levels. That’s not the double-digits we got this year, but respectable all the same. More thoughts from Lee in this Business Insider article.
Now, no analyst gets it right all the time. Good times ahead are predicated on no surprise disruptions that rip apart the economy. And if the last four years have taught us anything, it’s that the world is unpredictable.
So, my advice? Have a plan, stick to the plan. And embrace the ‘Secret of Life’ as per the song by singer/songwriter James Taylor (hint: the secret of life is enjoying the passage of time).
And For What It’s Worth…
It’s just coming to light that a Tesla engineer at the company’s Giga factory near Austin was attacked by a robot in 2021, according to an incident report filed with regulators. Witnesses say the robot, designed to handle freshly-cast aluminum car parts, pinned and immobilized the engineer and used its metal claws to stab his back and arm.
The engineer was able to break free from the robot only after a colleague pressed the emergency stop button, but then tumbled a few feet down a chute intended for collecting scrap aluminum, leaving a trail of blood.
Tesla said the engineer’s injuries did not require him to take any time off work.
I’m reminded of the writer Isaac Asimov and his “Three Laws of Robotics,” the first of which goes like this: A robot may not injure a human being or, through inaction, allow a human being to come to harm.
With AI coming down the pike at breakneck speed, I’m afraid we’re not off to a good start.
Best wishes for a happy and prosperous New Year.
P.S. As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.