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The Times They Are A-Changin' Thumbnail

The Times They Are A-Changin'

Market Musings

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group


The last several weeks we've explored some of the signs that markets are shifting. From valuations to labor weakness to economic softening, it's clear the times they are a changing.  The 1964 song "The Times They Are A-Changin'" is the inspiration for this week's musings.  Here's some trivia about the song:

  • This song was featured on Bob Dylan's album of the same name and reached #9 on the U.K. charts.  It was never officially released as a single in the U.S., but the album sold more than 500,000 copies in America.
  • Dylan wrote the song as an anthem for frustrated youth, with a flare of anti-establishment tones in the song.
  • Handwritten lyrics to four verses of the song jotted down on a scrap of paper by Dylan were sold for $422,500 in 2010 at an auction.  Hedge fund manager and art collector Adam Sender placed the winning bid.
  • The song ranks as number 59 on Rolling Stone's "500 Greatest Songs of All Time."
  • This song has been covered by the likes of The Byrds, The Beach Boys, Billy Joel, and Phil Collins.

"Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone.
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'."

Here's what we've seen so far this week..


Times Are Changing.  We think that markets are trying to tell us something, but what that is remains uncertain.  However, we would be wise to recognize that times are indeed changing.  The Fed cut rates back in September and the yield on the 10-year Treasury and the 30-year Mortgage receded in response.  However, over the past 3 weeks, the yield on the 10yr and the rate on the 30yr mortgage have risen.  Since bottoming, the 10-year Treasury Yield has risen 55 basis points and the rate on the 30-year Mortgage has increased 46 basis points.  So, what is the market telling us?  One interpretation is that the market perceives no further rate cuts and that rates - bonds, mortgages, auto loans, etc. - will stay elevated for the foreseeable future.  This would be bad for consumers that are already feeling strapped.  Another interpretation is that the yield curve is still steepening and recovering from being inverted for so long, but that once the curve is fully recovered (i.e., 3mth Treasury falls below 10yr Treasury), bonds will revert.  We have actually seen this play out once before in 1998.  The Fed cut rates 3 times in September, October, & November of 1998 - 25 basis points each, for a total of 75 basis points.  While the yield on the 10-year Treasury Bond dropped initially, it proceeded to head higher for the next 15 months.  Now, no two markets are exactly alike.  If you were investing in 1998, you will remember the LTCM debacle in September of 1998. The Fed stepped in to lower rates when Long-term Capital Management suffered massive losses due to bets on Russian currency and had to liquidate the fund(s).  What we did not see in 1998 was the correlation between Gold and the S&P 500 Index.  The two assets typically do not move in tandem.  Historically, gold and equities have a negative 0.08 correlation - meaning they do not move in tandem, but in fact, move in opposite directions.  However, in 2023 and so far this year, both the price of gold and the S&P 500 are each up double-digits in return.  Since 1928, the two assets have each moved higher by double-digits in 15 different calendar years (or, only 15% of the time).  What tends to happen when this rare instance occurs?  In 33% of the instances, the S&P is lower the following year.  Now, that's not exactly a fail-safe kind of statistic.  But, the fact that the two assets moving together is so rare, it makes one start to look at other historical references.  This year, so far, the S&P 500 is up more than 20%.  Last year, the market was higher by 26.29%.  If we take a look at history, we find 55 calendar years out of 96 total years (going back to 1928) when the S&P 500 finished the year higher by double-digits.  How often does this happen when the S&P has two consecutive years of double-digit gains?  Of the 55 years of double-digit returns, 29 times (53%) the S&P 500 experiences back-to-back double-digit years.  What happens in the 3rd year after two consecutive double-digit returns?  Only 13% of the time the S&P 500 has a 3rd consecutive year with a positive return.  So, if history were to repeat, next year would likely either be a lower (single-digit) positive return or a negative return.  Time will tell which is the outcome.

Better Start Swimming.  While I get the point behind Dylan's song from the '60's about politics and Civil Rights, the song in-and-of-itself is a little bit of an oxymoron.  Time is never constant - it's always changing.  We never stay the same age, we get older.  Markets are no different - they are constantly in flux.  The beginning of the 4th quarter last year saw markets renewed with hope of coming Fed rate cuts and "growth" / momentum stocks took off.  In fact, the breadth in Nasdaq stocks soared from a low of only 18% of Nasdaq stocks out-performing their 200-day moving averages in October, 2023 to more than 50% out-performing by the end of 2023.  However, the situation is different today.  After making a high, in terms of breadth, on July 15th with 53% of Nasdaq stocks out-pacing the 200 DMA, that number has dropped and has been range-bound (currently at 45%).  Does this mean that Nasdaq stocks are due to implode? No, not necessarily, but the range has tightened, meaning it's likely to break out from the current level either higher or lower.  One reason for the decline in breadth is that many of the "growth" / momentum stocks in the Nasdaq have reached extreme valuations.  So much so, that the S&P 500 Index is being affected.  The market cap of the largest stock relative to the 75th percentile of the index has exceeded the same measurement as in 2000 and 1932.  In addition, the weight of the 10 stocks of the S&P 500 Index is greater than at any point since 1985.  Another way of looking at it is by examining the top 10 holdings of the index in 2000 versus today.  The largest holding in 2000 was GE at more than 4%.  Today, Apple is the largest holding at 7% (nearly double the level of GE in 2000).  The top 10 names in 2000 made up more than 23% of the index.  Today, the top 10 holdings comprise more than 34% of the index.  If we think about that logically, among 500 different holdings, 34% of the index is affected by only 2% of its holdings.  On top of that, the S&P 500 Index continues to make new highs.  Why?  Investors keep adding to existing positions.  U.S. Large Caps saw massive inflows of over $12 billion last week alone.  Defensive sectors actually saw outflows, while the momentum names continue to receive inflows.  Can this situation continue?  Yes - but, with history as a guide, we know it won't last forever.  Investors would be wise to adopt a sound diversification strategy and avoid trying to chase the "hot dot."

The Times They Are A-Changin'...
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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general. 

Past Performance does not guarantee future results.