We often remind people that they are invested in dynamic profit-making companies, not in the news story du jour which often dictates people’s perceptions. The difference has perhaps never been starker than it was last week. While most people were fixated on the debt ceiling talks in Washington and potential spillover risks to the stock market, artificial intelligence (AI) related companies such as Nvidia, Google, and Microsoft advanced sharply. Those who scared themselves out of the market missed out on participating in substantial gains with these companies.
At the same time, there are some objective reasons for caution in the market right now. Despite the S&P 500 advancing 9.53% for the year through May 26th, the market is weaker than it appears. The equal weighted version of the S&P 500 is negative for the year, as is the Dow Jones Industrial Average. Only 45% of the stocks in the S&P 500 are positive for the year. Market gains have been concentrated in technology-related sectors while 7 of the 11 market sectors are negative (all data from Bespoke). A market advance led by a relatively small number of companies is generally not indicative of a healthy market, and it implies a higher risk of a decline in the coming months. To account for this risk, most client accounts have a higher allocation to interest bearing cash/money markets and ultra-short bonds.
This remains a market struggling for a clear direction; overall conditions are not characteristic of a bear market or a bull market. While this environment may last several more quarter, it is not appropriate to get overly negative. Rather, we must get through this period with quality stocks, risk management, a defined process, and some patience. Ultimately, there will be a new bull market waiting for us on the other side.
