Today, Bruce and Alex Koury talk about the S&P 500’s present situation and potential future growth, emphasizing the role that specific stocks and more general investment strategies play in these turbulent times.
Alex begins by outlining the S&P 500’s incredible 2023 performance, powered mainly by seven stocks—dubbed the ‘Magnificent 7.’ These are IT behemoths like Apple, Amazon, Meta, Google, Microsoft, NVIDIA, and Tesla, who together accounted for 80% of the index’s returns. At the same time, the 493 stocks that were left were essentially unchanged. This concentration calls into question the durability of such growth and the possible consequences of excessive reliance on a small number of well-performing firms.
Bruce highlights how AI is driving these tech firms, and he recommends that investors should be cautious about the anticipated downturn in the market, even though they might still perform well in 2024. Bruce draws attention to the risk of recency bias, which occurs when investors assume that the future will look like the recent past and may fail to see other investing opportunities.
What about financial tactics in light of inflation and varying interest rates? Bruce draws attention to the recent decline in the 10-year Treasury yield and speculate that there may be opportunities to purchase fixed-income securities, especially bond mutual funds trading below par. He also discuss how the Federal Reserve’s interest rate policy may impact money market funds and CDs. Bruce also counsel listeners to incorporate diversification and long-term planning into their investment plans.
Alex cautions listeners not to fall victim to recency bias and the hype surrounding AI and tech stocks. Even though these stocks have done well, it is still worthwhile to investigate other industries and prospects. In addition, he stresses the value of having liquidity and getting ready for possible market turmoil in 2024.
As the episode ends, Alex and Bruce stress the value of diversification—not just in terms of asset classes but also in taking into account industries other than the tech stocks that have been performing exceptionally well. They also discuss the possibilities of annuities and fixed-income investments in the current economic environment. They remind listeners that, particularly in the face of persistent inflation, a balanced approach to investing is necessary, one that considers both short-term income requirements and long-term gain.
For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management.
Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.
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Alex Koury CFP®, CERTIFIED FINANCIAL PLANNER™ professional and Wealth Manager in Scottsdale, has worked in the financial services industry for fourteen years as a financial advisor and Financial Planner. He holds Series 7, 9, 10 & 66 securities registrations– and is a Registered Representative with Commonwealth Financial Network®.
Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC. He has been in practice since 1997, with offices in Prescott and Scottsdale, Arizona. With his robust team of tax accountants, Enrolled Agents, and Certified Financial Planner® professionals, Bruce developed a synergistic approach to delivering a Foundational Financial Plan™ for his clients, covering some of the most vital aspects of tax, estate, and wealth planning. In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners • Tax Reduction Strategies • Financial & Estate Planning • Investment Management • Retirement Planning • Insurance Strategies • Business Owner Exit-Planning Strategies • Current Events and their Market Effects.
Jon “Jag” Gay: Welcome to Protecting and Preserving Wealth. I am Jon Gay. I’m joined today by Bruce Hosler as well as Alex Koury. Good to be with both of you.
Bruce Hosler: Thanks, Jon. It’s great to be with you today.
Alex Koury: Thanks, Jon.
Jon: All right. We’re talking about the S&P 500 and as we’ll soon see a specific portion of the S&P 500. Alex, right off the top, what’s happened in 2023 with the larger index?
Alex: Yes. 2023 has been quite a turnaround from what we saw in 2022. Year-to-date, the S&P 500 is up a combined 19% through yesterday. There’s actually only been seven stocks though, aka the Magnificent 7, that have contributed 80% returns year-to-date, while the other 493 stocks in the S&P 500 have remained absolutely flat for the year.
Jon: If I’m understanding you correctly, Alex, you’re saying that those seven stocks have really driven all the growth in the overall 500.
Alex: It has. The Magnificent 7 includes Apple, Amazon, Meta, Google, Microsoft, NVIDIA, and Tesla.
Jon: Those big seven tech stocks. Does that mean those Magnificent 7 are going to continue to outperform the markets in 2024 as best you can guess?
Alex: It’s hard to say. With such a run-up of what we saw throughout 2023, it’s easy for people to get trapped in the mindset of if it’s going to continue to perform well now, it might as well do it again in 2024. There are no guarantees of any future returns. I think it is an opportunity to really look at the broader market to see what may be on sale or what other things you may want to consider investing your money in going forward into 2024.
Bruce: What happens is people get used to what has happened recently and they cannot see going forward that things change. Now, you call them tech stocks, Jon, but really these are all tech AI stocks and that is what has really moved these stocks forward this year because they’re associated with AI and that’s opportunity and they have momentum going into 2024. Will they continue? Probably for some period of time, but the dangerous part is when does that stop and when do they have a correction because they probably do, right?
Jon: Right. That’s the whole past performance. It doesn’t indicate future results. You mentioned Microsoft. If memory serves, they bought ChatGPT, which is probably the most well-known AI software. Then all these other companies, as you mentioned, Bruce, they are using AI within their platforms. Obviously, Meta, formerly Facebook, now Meta using that. They own Facebook, Instagram, WhatsApp, and then all these other ones that Alex mentioned as well.
Bruce: Absolutely. That doesn’t guarantee that they’re making profit, but there is tons of money pouring into that space, certainly.
Jon: Got it. Alex, what steps can listeners take or use to invest wisely in these, we’ll use the phrase, interesting times?
Alex: Most importantly, as Bruce already mentioned is don’t get caught up in the hype at this point. If you invested from the beginning and you made some profits, you made some good returns, be happy with those, but don’t think that just the returns of the stock market going forward are only going to be tied to those seven stocks. If we look back at what happened in 2020 during the pandemic, there were as well a handful of stocks that contributed to a lot of the returns during that period just as well that have pretty much failed ever since then.
We don’t want to get caught up in just the AI hype, as Bruce mentioned, as well. That may be a fad for now, and there’s other things and other opportunities I think are really more interesting to be looking at, at this point.
Jon: I always joke that if I had a time machine, I would go back to February of 2020 and buy up all the stock in Zoom and Netflix, given what was about to happen in the first quarter of the year.
Bruce: Right. Now Zoom, look at Zoom, it’s horrible right now. It’s terrible. The whole idea of just buy and hold has been thrown out the window with what’s happened in this market is definitely a stock picker’s market where asset allocation can make a big difference, and that’s what Alex is talking to, recency bias. What’s happened recently, the premise that it’s going to continue to happen that way may not be the case into 2024.
Jon: You make a great point, Bruce. How should our listeners think about interest rates and inflation regarding your investment strategy? Full disclosure, we’re recording this on November 29th. We don’t know what’s about to happen next, as always, as you’ve been mentioning, but what should listeners think about?
Bruce: It is just really interesting to me. The Fed has not changed anything as far as their rates, and yet, if we look at the 10-year treasury as of today, it’s down to 4.294%. Less than 30 days ago, it was above 5%. In the end of October, let me see, somewhere around the 18th of October, it was right at about the 5% range on the 10-year treasury. We already see the higher interest rates that the Fed has pushed into the marketplace affecting the 10-year treasury.
Now, again, recency bias, is it going to continue to do that? Could the 10-year go back up again? It could. We think there’s some opportunities in the fixed-income space. Some of these bonds are trading below their par value inside of bond mutual funds, and so there’s a buying opportunity there in some spaces. We’re not making any recommendations on the show right now. We’re just making people aware that some of the bonds inside of bond mutual funds are trading at a discount, in addition to paying an income stream, a yield, if you will, north of 5% to 6%.
For those people that are conservative, we look at the short-term money markets. Those are going to start turning down in the near term because the interest rates, like on the 10-year, have come down. We foresee that happening. If people think they’re going to be able to buy a one-year CD or a six-month CD and get 5% now, when that renews, it may not still be at the high-interest rates that they are right now. Certainly, inflation is still raging out there. It’s just ameliorated on the rate of increasing, but it’s still high compared to where it was two or three years ago, let’s say 2019, before COVID came into the view. I don’t know. Alex, do you have a thought on those issues around interest and inflation?
Alex: At this point, we’ve seen the last Federal Reserve hike was done in September, and for now, they’ve gone on a pause, and we’ve seen the reaction in the bond market reflect that same idea that the Fed may be done, and it doesn’t have to raise interest rates any longer. Typically, that could mean a good period for bonds and stocks in the market during the Fed pause where they don’t raise interest rates to perform very well. Now we’re going to be looking for, waiting for that first cut in interest rates. What does that mean? That means probably at that point, the economy is not doing as well.
They’re going to be forced to encourage or promote business and economic activity. That would be a sign more of that recession that everyone keeps talking about that we just haven’t seen quite yet. To be quite honest, as we saw even today with the GDP number for the most recent quarter, business is still doing very well. Let’s not get it twisted, only that seven companies can do very well. The market economy as a whole right now is performing very well. With that being said, there are opportunities to invest in other things beyond just those seven companies today.
Bruce: Perhaps maybe better opportunities.
Alex: Better opportunities, absolutely.
Jon: Yes. You both mentioned this. A lot of investors have piled a record amount of money in the money market funds over the last 2 years, interest over 5%, as was mentioned before, and avoiding that volatility with stock and bond markets. Alex, are there alternatives to doing this if this might not be a great idea going forward?
Alex: As Bruce mentioned already, when the Federal Reserve begins to reduce their interest rates on the federal funds rate, you will start to see money market fund rates decline. People that think their money is safe in the money market fund, that’s okay for now. Think about, you’re going to lose the interest rate you’re earning on basically free or cheap money. You want to be thinking about bonds, fixed income for your safety, especially if you’re a retiree, locking in rates for the next, say, five to seven years. That’s one idea.
If you’re a little bit more conservative, think about generally speaking, annuities may be a great option for those that want guaranteed money and guaranteed returns over a longer period of time. What’s happened in the annuity market, as you’ve seen, guarantees go to their highest levels that we’ve seen in quite some time.
Alex: Again, another opportunity to lock in good interest rates for the long term.
Jon: As we start to wrap up today’s episode, gentlemen, Bruce, what are your big takeaways? What lessons can our listeners learn, and how can they apply those lessons to their personal situation?
Bruce: 2023 tells us that, number one, it might be a stock picker’s market or an asset allocation market. Let me explain that. If you were overweighted into the NASDAQ or to the tech stocks, you’ve had a very good year. Even though it’s been up and down, you had a good year. If you did not have exposure to those sectors, you’ve had a very flat year, a very zero year. The first lesson I think that we learned from this is you have to be diversified in your portfolio.
You need to have an allocation to both tech and AI and maybe some other stuff like that because some of the rest of it is going to be on sale and maybe a better buy than those specific AI tech stocks. When those AI tech stocks run their distance and they run out of gas and there’s a correction, as we saw a correction in 2022, NASDAQ dropped 30% during that year. It was tremendous. Being diversified, you don’t want all your eggs in one basket.
I think number two, as Alex has talked about, there’s some opportunities in the fixed income space where some of the annuities, where the interest rates are high. This is the highest we’ve seen.
I don’t know if this is the total height. There’s really smart people that are saying the Fed’s going to have to cut in the first quarter and there’s really smart people saying maybe it’s going to be higher for longer.
You can’t count on anything being for sure. Nobody knows the future for sure. You have to be invested so you can protect yourself on both sides. You might use a diversified portfolio to accomplish that. Certainly, you want to be looking at your financial planning and your income needs and plan your income from sources in the short term that are going to be income sources and give your portfolio a chance in the long term to take advantage of growth because we have this inflation and it is here. It’s not going away anytime too soon. People need to be aware that they have to have investments that can keep up with inflation. Do you have any other thoughts on that, Alex?
Alex: Yes. As we’re planning or as you’re planning for your 2024 and beyond, think about what your cash needs are. If you’ve made good money in 2023, set some money aside so that way you have enough liquidity. Should we go through a volatile 2024 or beyond that, you have enough cash that’s not going to lose to erosion based on losing market returns. That’s my biggest takeaway there. Also just to point out as well, we’re heading into an election season. 2024.
A lot of people are going to be focused on who’s going to be elected president. Is it going to be a Republican, a Democrat? We don’t have to name any names at this point. Something to keep in mind is that typically the market doesn’t necessarily care who’s in office. They just want to make sure that there is someone in office in that presidency role. Don’t get too caught up in the hype of who becomes president or not. Typically the market does just quite well, regardless if it’s a Republican or Democrat. We’ll have more to talk about that in the new year as well.
Jon: This has been really important stuff as we look to plan toward 2024. If our listeners have any questions about their specific situation, Bruce, they want to reach out to you at Hostler Wealth Management. How do they best find you?
Bruce: Alex, how do they get a hold of you in Scottsdale, buddy?
Alex: You can call our office down here. The number is area code 480-994-7342.
Bruce: Of course, you can reach us on the website at hostlerwm.com or in the Prescott office you can reach us at 928-778-7666.
Jon: Great stuff, gentlemen. We’ll talk again soon.
Bruce: Thanks, Jon.
Alex: Thank you, Jon.
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