It was another strong quarter for a narrow set of large U.S. companies, particularly in the technology sector. Two stocks, Apple and Nvidia, accounted for almost 75% of the S&P 500’s return. Most everything else was left behind save the emerging markets, which had strong performance on the back of the improving economic backdrop in China, Taiwan, and India. Small cap stocks struggled as investors flocked to what was doing well elsewhere.

So far in 2024, the stock markets have been mostly driven by just a few companies. The continued rally in stocks has been incredibly narrow (see chart below), which in our opinion, makes for an unhealthy market. A broad-based market run in which all companies moderately participate on the back of strong economic conditions and optimism would be a welcomed change.

How Are We Invested?

In 2024 a well-balanced, diversified portfolio of stocks and bonds has underperformed a strategy in which an investor owns 1) only large U.S. stocks or 2) even worse, only large U.S. growth stocks. Both of these strategies ignore the risk of being concentrated (having a portfolio heavily weighted toward a small set of companies).

We have been discussing with our clients how we use BlackRock’s Allocation ETFs as benchmarks for our strategies. While no benchmark is perfect, they allow us to have a natural comparison against what a passive investor with a similar risk profile might be doing. These ETFs are positioned with allocations in stock and bond markets globally, with differing weights in each depending on strategy. We then design our investment portfolios to allocate differently in order to mitigate risk and position more appropriately.

A major difference in our investment lineups is that we own more stock market exposure than our benchmarks, and have less in bonds. While that may seem more risky to some, we believe that this will deliver better results in the long run due to the fact that stocks have historically been the better vehicle for beating inflation. In the last 20 years (see below), the bond market (measured by the ETF AGG) has barely kept up with inflation, while the S&P 500’s return has dwarfed it.

With More Stocks, How Do We Manage Risk?

We have written about stock and bond market correlations before, but it is worth reiterating: as interest rates and inflation have been rising in recent years, stock and bond returns patterns have been converging. We may be in a new market environment in which bonds do not hedge stock market downturns as effectively as in the past. The chart below is a reminder of this phenomenon. Since 2020, the correlation of returns has become quite high.

Instead of simply using bonds to hedge our stock exposure, we add in a layer of call and put options that dampen market volatility. While esoteric, these tools help to keep our clients’ portfolios from experiencing all of the stock market’s ups and downs. In a straight-up market like the first half of 2024, you do not get all of what’s being given. But if we see a downturn or increased volatility, the hope is that the hedges could help us hold up better.

Looking Forward

We certainly live in interesting times. As we move closer to the U.S. election in November, investors will be attempting to “price in” many different scenarios. After a disappointing debate performance by President Biden followed by commentators questioning his mental acuity, and a failed assassination attempt on former President Trump, the market’s chips at the moment are seeming to fall on a Trump victory. If we swing back to a Republican-controlled White House and Congress, investors will likely be excited for the echoes of 2016, another administration focused lower taxes and a pro-business agenda. However, protectionist foreign policy and trade restrictions could lead to higher prices on goods. It’s far too early to tell, and there’s a lot of time for things to change before November. If the prospects turn back to a Biden win, we would likely see market participants bidding up the prices of companies that would benefit from significant fiscal spending and higher inflation.

Conclusion

After a nice market run-up this year, managing risk is key. Losing less means that you don’t have to make up as much on the way up.

With you for the long haul,

Carter Ellis, CFP®
Founder

Disclosures:

 Past performance is no guarantee of future success. This material is for informational use only and should not be considered investment advice.

 The opinions expressed are those of Guardian Wealth Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. Investing involves risk. Principal loss is possible.

 Investment advisory services offered though Guardian Wealth Advisors, LLC D/B/A Valley Peak Financial. Guardian Wealth Advisors, LLC ("GWA") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about GWA's investment advisory services can be found in its Form ADV Part 2, which is available upon request. GWA-24-55