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As of November 17, 2023, the S&P 500 index is up over 18%, while small cap stocks (as represented by the Russell 2000 index) are only up around 3.46% for the year, and bonds (shown below as the Bloomberg US Aggregate bond index) are only slightly positive for the year +0.54%.
Needless to say, 2023 has been another challenging year in the markets, with just seven stocks driving more than 90% of the total return in the S&P 500 and NASDAQ 100, while the other 493 stocks collectively down -2% on the year.
With regard to portfolios, our positioning throughout the year has been defensive as we have seen concerning economic data, as well as signs that consumer spending, the primary driver of the US economy could be weakening.
Torsten Slok, the chief economist at Apollo Asset Management, sent out four slides this past weekend which highlight the continued concerns about the consumer but also general economic conditions that are flashing warning lights.
The first chart shows how lending conditions have rapidly slowed over the past several months. Notice how the last time we had a rapid decline off a prior high coincides with the 2007-2009 time period?
The next chart shows a sharp increase in credit card delinquencies by age. Right as the Fed started their most aggressive rate raising regime, delinquencies started to tick up, as interest rates on credit cards also readjusted upwards. While the absolute levels are below the 2008 prior highs, the upward slope of the line is steeper, which we view as an ominous warning for the state of the consumer going forward.
The third chart shows a similar but confirming story. Delinquencies on auto loans have seen a sharp increase coinciding with when the Fed started raising rates in 2022. Again, we aren’t at 2008 levels, but the slope is very sharply pointing upward and doesn’t show any signs of peaking soon.
The last chart highlights defaults on lower quality bonds and loans. In most cases, a sharp move upward in the percentage increase on a yearly basis is a fairly good indicator that economic conditions are not strong. The only period that did not yield a recession was in 2016, which was during the European debt crisis and the US narrowly escaped a technical recession.
The last point that I would like to make is to draw attention to the “lost decade” that was 2000 – 2010. As you can see below, the S&P 500 had significant periods where there were retracements of -40%, but also periods of significant rallies.
Timing can be the most difficult part of managing the business cycle as the market has a knack for lulling investors into complacency.. The prelude to the 2008-2009 downturn showcased such challenges, with notable market surges followed by steep declines. Our current strategy is deliberately structured to protect against these fluctuations. We're prioritizing allocations in short-term, cash-equivalent assets with robust yields of approximately 5% and investing in liquid alternatives that are designed to maintain a minimal correlation with the stock market's movements.
As always, please feel free to reach out to us with any questions or comments.
All the best,
Glenn Moore - Gordon Asset Management, LLC Investment Policy Committee