July 15, 2024

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“To infinity, and beyond!” In the Toy Story movies, Buzz Lightyear believes he can set a course to infinity. Buzz, of course, is a “space explorer” misplaced here on Earth with a cast of misfit toys. Perhaps Buzz is also an investor in NVIDIA. After all, the stock price has been headed “to infinity, and beyond!” Fortunately, at our recent companywide training, our Rogue Jet Boat captain didn’t share Buzz’s mindset and we all returned safely! We hope you are also having some fun this summer.

As new technologies come to market, the stock market has rewarded the winners, and handsomely so. Apple rose to prominence on the smartphone. Microsoft on the PC. Are GPUs, or graphics processor units, the next great technology? These chips, originally developed for video games, process images rapidly. This makes them the preferred building block for artificial intelligence applications. NVIDIA sits in the prime position for this new technology, and the stock price has benefited greatly. Just five years ago, NVIDIA was around a $150 billion market capitalization company, similar to Intel’s market cap today. Over the past few years, this stock has seen growth with very few historical comparisons. In the Second Quarter of 2024, NVIDIA briefly became the most valuable company in the global stock market- well over a $3 trillion of valuation! Unlike the internet bubble, however, this company’s earnings have also experienced explosive growth. The key questions for investors are, “Will the buyers’ appetite for NVIDIA chips remain after the initial buildout?” and “At what value does the stock price fully reflect their orbital earnings growth?”

These questions are relevant for all investors, as NVIDIA now represents nearly 7% of the S&P 500. In fact, the top 6 companies (Microsoft, NVIDIA, Apple, Amazon, Meta, Google) in the S&P comprise over 30% of this index! Stocks are historically concentrated, and investors should be cognizant of this risk. In such an environment, it is challenging to maintain diligence and diversification. After all, investors have become accustomed to gains in these securities, regardless of the prices paid. It’s prudent to note, however, that historically such concentrations have led to disastrous results for investors. Cutler believes that valuations matter, and we continue to advocate that our clients invest as such.

In the second quarter, the stock market produced a return of 4.28% as measured by the S&P 500. There have been 31 all-time highs set by the S&P 500 this year. However, the second quarter’s market dynamics looked more like the top-heavy market (aka technology led) of 2023. Most of the quarter’s gains were in June, and yet 301 of the companies in the S&P 500 had a negative return for the month. Like 2023, growth stocks led the market higher. Year-to-date, Large Cap Growth has once again opened a sizable lead over Large Cap Value stocks, 20.7% (Russell 1000 Growth) versus 6.6% (Russell 1000 Value).

A similar dynamic has played out internationally where technology and growth have led markets higher. Yet while the S&P 500 is about 1/3 technology stocks, the MSCI EAFE (Europe/Australasia/Far East Index) is around 10% technology, which has translated to stronger overall returns here at home. The MSCI EAFE has a year-to-date return of 5.75%, while the MSCI Emerging Markets Index sits at a respectable 7.68%.

While the artificial intelligence investment theme has been driving strong returns for a portion of the stock market, the rest of the market continues to be dependent on the Federal Reserve’s interest rate policy and inflation outlook . Small-cap stocks are perhaps the best example of this dependency, as small companies are more reliant on short-term outside financing (short-term debt). The Russell 2000 small-cap index suffered from March’s higher Consumer Price Index (CPI) reading at 3.4% and finished -3% for the quarter. Bonds also fell in sympathy, and the Bloomberg Aggregate now sits at -0.71% for the year. As the Spring progressed, inflation data came in milder which has recently brought bonds back into positive territory for the year. Yields near 5% should continue to cushion any inflation surprises, and we believe bonds have fair value at today’s levels. For investors in cash equivalents, we encourage them to extend their maturities to “lock in” today’s higher rates. While a significant drop in interest rates does not seem likely currently, in our view attractive options exist in the 2-3-year time period.

How to invest during a political year?

At the forefront of our clients’ minds is the current national election. As the summer begins, we have seen some seismic political events unfold in Europe. Notably, the UK election saw power swing from the Conservatives to the Labour party. In France, while President Macron remains, the composition of his alliance has changed significantly. What happened to their stock markets on this news? While there was a modest one-day reaction, the overall net impact was minimal.

As we look over the historical data, the argument for positioning portfolios for a particular political outcome is weak. Consider the current Presidential administration as just the most recent example. Nearby is a screenshot of the United States Oil Fund (in red) vs. the iShares Global Clean Energy fund (in purple) since inauguration day. If investing based on political priorities, an investor would have expected the opposite outcome over the past several years! (These funds are shown as illustration, not as investment advice.)



This second chart provides further clarity on a point Cutler believes is relevant; Stocks have historically done well under both Republican and Democratic leadership.  NVIDIA still wants to sell chips no matter who is President. Apple wants to sell phones. And you will still use Google to find information on the internet! Our recommendation is to identify an investment portfolio that aligns with your goals and don’t worry about the election. That can be challenging in today’s politically charged environment. But remember, it isn’t timing the market, but time in the market¸ that is the greater contributor to long-term investment success!


 

Source: BEA, Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Data is calendar year.
Guide to the Markets – U.S. Data are as of February 29, 2024. 

Past performance is not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be profitable or suitable for a particular investor's financial situation or risk tolerance. Investing involves risk, including loss of principal. You cannot invest directly in an index. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Source: Morningstar.

The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
The Barclay’s Aggregate Bond Index (Taxable Bond) is a broad base, market capitalization weighted bond market index 
representing intermediate term investment grade bonds traded in the United States.

The US Large Value Index measures the performance of US large-cap stocks with relatively low prices given anticipated per-share earnings, book value, cash flow, sales and dividends. This Index does not incorporate Environmental, Social, or Governance (ESG) criteria.
The US Large Growth Index measures the performance of US large-cap stocks that are expected to grow at a faster pace than the rest of the market as measured by forward earnings, historical earnings, book value, cash flow and sales. This Index does not incorporate Environmental, Social, or Governance (ESG) criteria..


All opinions and data included in this commentary are as of June 30, 2024 and are subject to change.  The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This report is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase securities. This information should not be used as the sole basis to make any investment decision.  The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed.  Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.