Opportunities

Written By David Vomund

November lived up to its reputation as a historically strong month and the rally continued into December with the S&P 500 reaching a 2023 high.  The summer selling ended in October and the bull market that began in October 2022 continued.  I’m not sure why market lows often occur in October.

The recovery to its 2023 high came after the S&P 500 dropped 10.3 percent.  For those that own non-profitable technology stocks it was a wild ride.  Those that owned dividend payers received their dividends while they waited for stocks to recover.  And then there are those that panicked and sold when stocks were low.  Oh well.

Investors should expect pullbacks of 10 percent or more.  That happens most years.  It even occurs during the best years.  Since 1928 there have been 34 years where the S&P 500 gained 20 percent or more.  Among those 34 years, stocks fell 10 percent or more during the year 16 times!  

Why the recent strength in stocks?  Credit prospects for interest rate cuts sooner rather than later.  Sooner being in next year’s first half.  Also, there are trillions of dollars in cash equivalents earning five percent.  Some of that cash moved back into stocks and some into fixed income.  More cash will find another home as rates slide.  Add it up — falling rates and lots of cash — and the market has a tailwind.

I expect interest rates to work their way lower.  For that reason I have recommended vehicles including preferreds with yields ranging from 6.5 percent to 7.5 percent.  Ares Capital yields closer to 10 percent.  My approach: have some exposure to vehicles that will do well if rates rise (floaters) and others if they fall.  The latter include fixed preferreds from Axis Capital (E), PartnerRe (J) and RenaissanceRe (G), three large reinsurance companies.  While their yields have come down and their prices have edged higher they are still attractive to those who want to nail down an income stream.  

Among stocks the focus for many continues to be on the Magnificent Seven, as they are known.  These big-cap technology stocks distort market returns because they loom so large in the S&P 500 (approx. 30 percent).  But the equally weighted S&P 500 (symbol RSP) only has marginal year-to-date gains.  Mid-cap and small-cap ETFs, like iShares Russell 2000 (IWM), haven’t participated.  That is changing now.  Bottom line:  there are a lot of opportunities and money market cash will fuel the rallies.  

David Vomund is an Incline Village-based Independent Investment Advisor.  Information is found at www.VomundInvestments.com or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.