Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

1st Quarter | 2024

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By Will Hubbard

2023 has been a strange year, confounding not only investors but also economic experts and market pundits. At a time when most were bracing for the worst, the U.S. economy has exhibited unexpected resilience. Adding to the unpredictability is the unusual concentration in major U.S. equity indexes, with a handful of tech giants steering the market direction.

All of this has led us to question forecasts and underlines the importance of agility and adaptability in our investment approach. In times such as these, it’s important to survey the landscape, understand the trends, and maintain perspective. Let's dive in and examine a couple of the narratives that have perplexed us so far this year, and discuss how investors should respond.

Recession or no recession?

Many expected that the U.S. economy would be in a recession at some point in 2023. Halfway through the year, investors are still wondering whether that prediction will come true.

Current economic indicators seem to be painting a more optimistic picture.

For instance, GDP for the first quarter has been revised up to more than 2% annualized and is expected to come in at more than 2.1% for the second quarter, according to the Atlanta Fed’s GDP Now forecast. Additionally, inflation appears to be improving, with year-over-year inflation measures reverting toward the Federal Reserve’s 2% target. This stabilization is largely the result of increases in transportation services and declining energy prices.

Contrary to expectations, the rapid rise in interest rates hasn’t crushed demand for housing. According to a RedFin article from late 2022, 85% of U.S. homeowners have mortgage rates below 5%. Because of this, more homeowners are staying put, reducing the supply of homes for sale and boosting prices. According to Bespoke Investment Group, six out of their seven housing-related indicators showed positive momentum.

Bespoke also publishes a Matrix of Economic Indicators, a review of dozens of indicators from various industries to gauge the overall health of the markets and economy. Last year, the net number of accelerating indicators exceeded -20, levels typically associated with a recession. That figure has rebounded to -5. According to Bespoke’s data, a reading of -5 indicates the end of a recession. However, despite plenty of signs that a slowdown did occur, no recession was called. Now the data seems to show that the economy is in recovery mode.

Should we be worried about index concentration?

At the end of the first quarter, we discussed the recent concentration of some of the major U.S. equity indexes. At that time, just 7% of companies in the NASDAQ accounted for 51% of the Index. These companies also had outsized year-to-date (YTD) returns.

This is still true, and the spread of YTD returns has only grown. As of Friday, July 7, the NASDAQ 100 was up 37.45%, the S&P 500 was up 14.57%, and the Dow Jones Industrial Average was up 1.77%. By contrast, the iShares ETF HDV, a dividend strategy popular among retirees, was down 2.85%.

As this disproportionate spread of returns illustrates, while some companies have done extraordinarily well during 2023, not everyone has kept up.

While chasing high returns is tempting, a rules-based investment approach that responds to market changes and isn't overly committed to a particular asset class or investment method is critical. This year's varied performance, where some companies have soared while others lagged, illustrates the necessity of this approach.

And we may see more volatility as we enter the next earnings season. The Wall Street Journal and FactSet report that a 7.2% drop in second-quarter profits is expected, marking the most significant fall since the second quarter of 2020, when the pandemic led profits to plunge 32%.

How can investors cut through the chaos?

In a year marked by economic surprises and varied investment performances, it’s easy to lose sight of the big picture. Should you hedge yourself against a possible recession? Should you stay on the sidelines until volatility dies down? Should you abandon diversification and lean into something like the outperforming NASDAQ?

As the old saying goes, “It’s tough to make predictions, especially about the future.” Instead, investors and financial advisers should look beyond short-term predictions and headlines and focus on positioning portfolios for future success. With a broad variety of quantitative, actively managed investment strategies that respond to market changes and continuously manage for the risk and opportunity present in all market environments, Flexible Plan Investments is here to help you do just that.

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