US Equities & the S&P 500 in Review

It's been a very interesting year for the US equity market and while I mostly wanted to focus on the S&P 500 - probably because it's what I mostly follow - first a few charts illustrating the YTD performance in the broader US equity market.

The high growth areas of the US equity market have had an extremely impressive year, with fan favorite (for now) FANG+ up an impressive +68.41% YTD through 2023. Semiconductors are up +43.99%, over 3x the S&P 500 composite's +13.50% YTD.

Of the major indices, the tech heavy NASDAQ 100 is leading by a considerable distance, up +35.47% YTD, while the value driven Dow Jones is up a very modest +1.12%.

The S&P 500's Information Technology segment ETF [XLK] is actually quite close behind the NASDAQ 100 ETF [QQQ]; up +33.85% & +36.05%, respectively.

Now onto the S&P 500. The S&P 500 market cap-weighted index is up +13.50% YTD, while the equal-weighted S&P 500 is up just +1.79%.

The three segments containing FANG+ mega-caps - XLC (Communications), XLK (Information Technology), & XLY (Consumer Discretionary) - are beating the S&P 500 composite's +13.50% YTD, while the remaining eight segments continue to struggle. Worth noting XLC very recently took the lead from XLK, though both are doing extremely well - up +35.82% & +33.85% YTD, respectively.

For those who aren't familiar, FANG+ is generally referred to as: Apple, Amazon, Meta [Facebook], Google, Microsoft, Tesla, & NVIDIA. They're broken down into the below S&P 500 segments:

XLK (Information Technology) - Apple, Microsoft, & NVIDIA

XLC (Communications) - Google (Class A & Class C), Meta [Facebook]

XLY (Consumer Discretionary) - Tesla & Amazon

Not sure if many still consider Netflix in FANG+ as it's up +19.66% YTD, which is above the S&P 500 composite average of +13.50. NFLX is included in XLC (Communications), which again is leading all 11 segments this year up +35.82%.

It's been pretty clear to most who are paying attention that the US equity market has recently been slowly losing steam. The S&P 500 composite average is down -1.13% in the last 3 month's. As shown above, ironically returns would look significantly worse if not for rising energy prices, propelling XLE (S&P 500 Energy) up +15.52% over the last 3 months.

Returns in the last month seem to reiterate US equity market participants could perhaps be feeling a bit more cautious. The S&P 500 composite average is down -2.78% in the last month. XLE (S&P 500 Energy) is actually the only segment of the 11 positive in the past month, up +3.73%.

I thought I'd share some ideas I've had on long positions. Without going too far into detail, I am partial to the macro thesis for this cycle of the US economy and thus the fate of the US equity market. Finally, it should be understood that investing preferences widely vary, specifically the duration some individuals or institutions intend to hold securities.

I've posted and been partial to XLE (S&P 500 Energy) for some time now. The timestamp on this chart says August 15th, so note the valuation of XLE relative to the S&P 500 isn't quite the same anymore. However I still think it has further room to go up and that's at least partially because I'm not convinced $91/barrel is the peak for crude oil in this cycle.

I did want to make one observation as it relates to energy. In my view, it is completely unintuitive - at least as a longer-term strategy for US equities - to be long on both energy and technology. High energy prices drive up US equity market returns in XLE, but they simultaneously result in higher energy prices for the broader S&P 500 composite ex-Energy, which puts downward pressure on corporate fundamentals as input costs are rising. Historically, large-caps in the S&P 500 technology segment tend to use more than the average amount of energy in production, sale, etc., therefore their fundamentals are more significantly impacted. It's an extraordinarily bold short-term strategy, in my view, but I personally think it makes little to no sense in the longer-term.

While XLV (S&P 500 health care) is down -3.80% YTD, it's actually outperforming the S&P 500 average in the last 3 months, down -0.95% while the S&P 500 is down -1.13% in the same period. There are exceptions, but for the most part valuations look good in this segment. It's also considered a growth segment that's proven to do well in some (not all) prior recessions. The mega-caps segments are just so incredibly expensive, so I sense health care has a decent chance of making a meaningful comeback.

These last two ideas currently range from not popular to very not popular. To preface, I think it could be helpful for US equity market participants to be aware since 1965, the S&P 500 composite averaged +8.5% in the 12 months following the 10YR-2YR yield curve inverting. In this cycle, the 10YR-2YR yield curve inverted on June 30, 2022. Whether or not US equity market participants are aware of - or even believe in - the lag at which monetary policy operates, it exists. The reality is absolutely no one should be surprised we're not in a recession yet. Outside of the COVID-19 pandemic recession, we are still early even on the short-end of historic contractionary monetary policy lag timeframes (if estimating using an interval from the point of 10YR-2YR yield curve inversion). High growth segments of the market should be outperforming defensives.

The chart above shows the ratio of XLP (Consumer Staples) to XLY (Consumer Discretionary) over the last 25 years. XLP includes companies such as: Costco, Coca Cola, Pepsi, WalMart, Procter + Gamble, etc. Not only do they typically outperform the market average in a recession, in my view some of them are generally solid longer-term investments. I feel this segment is historically undervalued even for a pre-recession environment. Unfortunately we are not in the early stages of a new, healthy business cycle forming and this is definitely not the beginning of a broad-based secular bull market in US equities (sadly).

As you can see in the chart above, XLU (S&P 500 Utilities) outperformed the S&P 500 composite average during the tech bust by a notable margin. Furthermore, their relative performance to the S&P 500 composite average over the last 25 year period in the chart shows Utilities peaked almost immediately after the peak of the GFC, in February 2009. While XLU is down a frankly terrible -14.43% YTD and sentiment is still not good (to put it mildly), valuations are excellent relative to almost anywhere else in the US equity market. This idea should really emphasize both investing preferences and buy/sell/hold times widely vary.

Thank you for taking the time to read and best of luck this week to all market participants!

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