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

The end of the third quarter kicks off the final stretch of the year. It’s also about the time my family and I take a short trip “up north” to experience the sights and sounds of fall. My wife, Abby, and I are always amazed at how different the colors of the leaves can be in different areas—sometimes within short distances of each other.

This year’s market feels similar. In the first nine months, the performance of the major U.S. indexes has been very different. Could a change of market season be on the horizon?

The dominance of the “Magnificent 7”

For the year through September, the NASDAQ 100 Index was up a whopping 35.3%, driven primarily by the “Magnificent 7.” These represent the largest technology companies—Apple, Microsoft, Amazon, Nvidia, Meta, Tesla, and Alphabet (Google)—which together heavily influence both the S&P 500 and NASDAQ 100 indexes. An equally weighted portfolio of these seven companies this year returned 88%, massively outperforming the other indexes.

However, the concentration risk (the risk of loss related to investing in similar assets) associated with the Magnificent 7 could be problematic for investors in market-cap-weighted indexes—especially if market dynamics are experiencing a “change of season.”

Russell-ing leaves: What are small caps signaling?

Stocks were negative across markets this past quarter, and selling pressure was strong throughout. Energy was the only positive sector in September, and six sectors were down more than 5%. Communication Services was the only other positive sector for the quarter, largely due to a 24% weight in Meta, which returned 5.2%.

Since 2000, the Russell 2000 small-cap index has tended to outperform the NASDAQ 100 by about 0.11% per year. Over the last 10 years, however, the tech-heavy NASDAQ 100 has outpaced the Russell by 10.9% per year.

Throughout history, small caps have been a leading economic indicator due to their sensitivity to economic tailwinds and headwinds, which is why they are typically associated with higher volatility and fall hardest when things get tough. From a business standpoint, they’re also nimbler and more adaptable to changing market demands. As a result, they are usually the companies that develop disruptive technologies or business models.

Bespoke Investment Group reported that the median S&P 500 stock return is up only 0.4% year to date, while the median Russell 2000 stock is down 6.6%. If small-cap stocks represent how people perceive the economy, then the performance of the Magnificent 7 is not an accurate barometer.

What market technicals indicate for Q4

Bespoke reports that market technicals do not look good going into Q4: “We’ve seen a series of lower highs and lower lows made since the market made its high for the year on the last day of July. For this negative technical action to turn, we’ll need indices to break above their early September highs.”

Currently, the major indexes are all forming downward trends. This creates its own set of nonfundamental headwinds for markets, large and small.

Preparing for the season ahead

In the face of rising interest rates, persistent inflation, and geopolitical events, it’s important to think about how your investments are positioned to benefit from different economic outcomes. Maybe the Magnificent 7 will take passive index investors to new heights by buoying other companies. Or, maybe the market season will shift, and the average business will start participating in the growth.

As the leaves change, I'll be here, observing, adapting, and ensuring I'm ready for whatever the market brings. If you haven’t already, now may be a good time to ensure your portfolio is designed to address market changes with dynamic investment strategies designed to respond to market risks and opportunities in every market environment. Flexible Plan Investments (FPI) simplifies this journey for you by offering a variety of dynamically risk-managed investment strategies and turnkey portfolios. Working with your financial adviser, you can determine the best dynamically risk-managed investment approach to help you prepare for the season ahead.

Comments are closed.