A Bull Market, or Is It?

A Bull Market, or Is It?

Last year was a tough year for investors, with stocks down nearly 20% and high-quality bonds suffering their worst loss on record. So, the rebound in stocks and bonds earlier this year looked like good news to investors hoping to recoup some of their losses from last year. But, alas, with nine months on the books, the prospects for a lasting recovery have faded. With three months to go until the end of the year, the recovery is looking tentative. As the table below shows, the S&P 500 return looks impressive, up 13%. It’s the rest of the market that has us concerned, with small-cap stocks only up 3%, the Dow Jones Industrial Average up 3%, foreign stocks up 7%, and high-quality bonds actually down for the year.

Three sectors within the S&P 500 Index are up 30% on average: technology (Apple, Microsoft), consumer discretionary (Amazon, Tesla), and communications (Google, Facebook/Meta). The other eight sectors that make up the S&P 500 Index, including health care, financials, energy, and others, are negative for the year, on average. In 2023, stocks have split into two groups — technology-oriented stocks and everything else.

As noted above, there are not many stocks that are doing well this year, and yet the S&P 500 Index is up 13%. How can that be? The popular S&P 500 Index is capitalization-weighted, which means that huge stocks like Apple and Amazon and others account for over 30% of the index. If we take those same 500 stocks and weigh each of them equally (2% for each stock), the index is up only 2%. This means stock returns are being driven by a small handful of huge technology-oriented companies — not a healthy environment, in our view.

For the third quarter the S&P 500 Index was down 3%, and it’s down 6% from its high at the end of July. While this does not qualify as a serious correction at this point, it does have our attention. We have raised our money market levels across nearly every model that we manage. The table below shows the broad allocations of our seven active strategies:

What to Expect Through Year-End

If 2023 were a typical year, we should expect a positive finish to the year. However, this year has certainly not been typical, especially with the strong rise in interest rates we have seen and the massive fiscal stimulus working its way through the economy. From a trend-following perspective, most areas of the market have stalled out, but most have not completely rolled over yet.

The chart below shows the S&P 500 Index over the past year (the green line is the 50-day moving average, the purple line is the 200-day moving average, and the red lines are support/resistance lines). From this, you can clearly see the weakness of the past two months. The index has broken through the 50-day moving average (green line) and is threatening to break through the first support line (upward sloping red line). The critical level we are looking for is the area in which the 200-day moving average and the horizontal red line (secondary support) converge. The is around 4200 on the S&P 500 Index. A break of this level will lead us to raise cash considerably across all the tactical strategies. So long as we remain above that level, we will be generally content with the cash already raised.

History favors a positive finish to the year, but we will let the trends guide us rather than try to outguess the market.

Portfolio Update
Keep in mind that because we manage clients’ portfolios individually, the holdings in your specific accounts may differ somewhat from the averages.

Strategies That Employ the FSA Safety Net®

Income (Strategy 1)
Bonds of most varieties continue to struggle in this environment of rising interest rates. High quality bonds fell during the quarter, while high yield bonds were relatively flat. The Income portfolio holds a mix of funds that have managed to weather the interest rate storm. During the quarter, we sold two funds with a focus on high yield bonds and added another floating rate fund (which tends to do well as interest rates rise). Currently, these portfolios hold 70% in bond funds and 30% in money markets.

Income & Growth (Strategy 2)
With both stocks and bonds weakening in the third quarter, we have been reducing our allocations to both asset classes. We reduced the equity allocation from 50% to 20% and the bond allocation from 40% to 30%.

Conservative Growth (Strategy 3)
We have generally avoided the weakest areas of the bond market in this balanced strategy, though we do own a high yield bond fund. As the stock and bond markets weakened in the third quarter, we reduced the equity allocation from 75% to 40% and the high yield bond component from 15% to 10%.

Core Equity (Strategy 4)
This all-equity strategy was over 95% invested in various stock funds in late July, but over the past two months, we have reduced the allocation to 60% (with 40% in money markets). The allocation to foreign funds is gone, with the entire portfolio consisting of various large-cap U.S. stock funds.

Tactical Growth (Strategy 5)
Even our most aggressive strategy has not been immune to the recent selling, with most portfolios dropping from 95% in equities to 55% over the past two months. We continue to hold modest holdings in technology funds, as well as energy.

Strategies WITHOUT the FSA Safety Net® 

Sector Rotation
After a relatively good year in 2022, this strategy has languished a bit in 2023, due in part to a very narrow market (which we discussed above). As of the October rotation, the portfolio rotated back into three technology funds, as well as two financial services funds. Interestingly, due to the market weakness of the past two months, the strategy also holds an inverse S&P 500 fund (designed to go up when the S&P 500 Index falls — and vice versa).

Global Rotation
This aggressive strategy continues to lead all nine of the FSA strategies for this year. During the quarter, we sold the remaining international fund and added a mid-cap growth fund (another fund with a heavy weighting in technology stocks). At this point, the strategy remains fully invested in equities.

Strategies That Remain Fully Invested Through ALL Market Cycles

Global Moderate
Any asset other than technology has been a drag on returns in 2023. So, the diversification of these strategies has hampered returns in the narrow market we have witnessed so far. Bonds have been no help either.

Global Growth
Any asset other than technology has been a drag on returns in 2023. So, the diversification of these strategies has hampered returns in the narrow market we have witnessed so far.

Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.

Ronald Rough, CFA
Chief Investment Officer


Disclosures are available at https://fsainvest.com/disclosures/market-update/.

FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is also available at https://fsainvest.com/disclosures/ or by calling 301-949-7300.



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