What is Really Taking Place in the Market? The Ongoing Comparison of Equal and Market Cap Weighted S&P 500: Market Commentary from Cabana’s CEO – May 2, 2023

1 year ago

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Year to date, we have seen the major indices (S&P 500, Nasdaq and Dow) move higher on the back of mega cap technology stocks like Apple, Microsoft, Meta and Amazon. We know this because the aforementioned indices are market cap weighted such that the larger the company in the index, the more its performance impacts the index performance. A simple comparison of these to the equal weight version tells the story. When you take out the effects of these gigantic tech companies, you see that instead of being up 7-10% since the beginning of the year, the broader market is flat or even negative. This is a really important thing to understand in my opinion and why we have spent so much time discussing what is going on under the hood versus what you see on TV or in your newspaper (do they still make those?). The fact of the matter is a whole lot of companies are struggling to meet lower and lower earnings estimates.  

We have seen a nice run up into earnings season, which began two weeks ago and saw most of those big tech companies report just last week. They all beat estimates (albeit lower estimates) and most beat on the top and bottom line. So how did the market respond in the face of all this good news from the flag bearers of the 2023 stock market? Well, it ended about where it began (S&P500). The S&P 500 started last week at the top of its recent trading range (3900-4100), and it ended there after all the good news came out on the mega cap tech companies. In between, it had a 3% selloff (from Monday – Wednesday) and a 3% snapback (Thursday – Friday). All in all, it appears that the market had already priced in these earnings and now we are going to have to look elsewhere for some help.  

It is one thing to see a bounce in Amazon, Microsoft and Apple and the like after declines of 30-50% last year in the face of skyrocketing interest rates. It is a whole other proposition to get that same response from the other 490 companies that make up the S&P 500. Traders love to take advantage of the relationship between interest rates and tech companies. When interest rates rise like they did last year tech stocks get pounded. The reverse occurs as well. When rates begin to pull back (even due to slowing forecasted growth or recession fears), traders jump on board and buy tech for a quick profit. In my view, this two-way trade phenomenon has been a major catalyst for the positive returns we have seen this year in the market cap weighted indices. In my opinion, the difficulty in sustaining this upward move in price is that it is occurring for all the wrong reasons. These stocks are bouncing from a bear market beating because interest rates are falling. Interest rates are falling because the economy is weakening, and the bond market knows it. See my point? Our view is that these stocks (and the market cap weighted indices) are not moving up because things are getting better – they are moving up because things are getting worse. 

Of course, markets are forward looking and maybe the market is looking around the corner to when things will get better. Maybe. Keep in mind, we are likely to see another 25-basis point rate hike by the Federal Reserve on Wednesday, which puts more pressure on an already weakening economy. It seems to me that we could have a ways to go before prices move up because our economy is getting stronger. I will be much happier to see the transports, financials, real estate and other cyclicals take the baton from big tech. So far that hasn’t happened. 

We will stay disciplined and take it day by day. We will continue to invest objectively based upon CARA and are prepared to add equity exposure should conditions in the broad market improve. 

We are currently bearish and allocated accordingly. 

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

“CARA” is Cabana’s Cyclical Asset Reallocation Algorithm. Scenes assigned as per the judgment of The Cabana Group. Scene names and number of scenes have changed over time in an effort to obtain efficiencies and provide clarity of investment objective. 

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

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All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq