Market insights and analysis

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

4th Quarter | 2023

Quarterly recap



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

By Will Hubbard

“A general is just as good or just as bad as the troops under his command make him.”

—General Douglas MacArthur

The movement of the components of the stock market these days—the companies that make up various indexes—makes me think of the relationship between generals and troops, especially in the days before modern, tactical warfare.

During the American Revolution, soldiers and generals marched together, shoulder to shoulder, to face an enemy head-on. American soldiers followed their generals, and the generals led them to victory.

In good times, market “troops” follow “generals”

In this way, the stock market can behave similarly to armies. Think of generals as the largest companies in an index—Apple, Microsoft, and Amazon, to name a few—and soldiers as the smallest companies—for example, Hasbro, Whirlpool, and Sealed Air Corporation. When things are going well, everyone moves in lockstep: The generals lead the market higher and the soldiers follow.

As of Friday, May 5, 44.8% of S&P 500 companies had a positive year-over-year price change. Over the last decade, we saw one of the strongest bull market runs ever, and it coincided with strong leadership from the “generals” and “rank and file.” A dip below 50% was rare. Coming off the heels of the global financial crisis, less than 10% of companies had positive year-over-year price changes.

Despite the lower than 50% reading, 2023 looks to be finding some footing. Companies are advancing, and the generals seem to be gathering the forces needed to make up some ground.

Investor anxiety and the temptation of cash and equivalents

After a challenging 2022, and with the continuing economic uncertainty around the debt ceiling, inflation, jobs, interest rates, and banking issues, investors are flighty and tempted by the enticing offerings of cash and equivalents. One-year CD rates are more than 5%, and many daily-liquid money markets yield over 4.5%. In last week’s In My Opinion article, Flexible Plan Investments president Jerry Wagner explained the potential long-term detriment of leaving equities to grab these yields.

According to Bespoke Investment Group, investor sentiment remains extremely bearish, based on The Conference Board’s monthly consumer survey and the American Association of Individual Investor’s weekly investor sentiment survey. According to The Conference Board survey, the number of consecutive months of bearish results is currently 16. By comparison, around the global financial crisis, it was 18.

Bullish indicators amid bearish sentiment

Despite bearish investor sentiment—meaning six months of a 20% decline from a 52-week high—the forward-looking returns are optimistic. In a report from mid-April, Bespoke also found that six months following a low, the subsequent six months have been positive 12 out of 13 times. The dot-com crash of 2001 is the only time new lows came in, and this instance could have been influenced by the events of 9/11. The average return six months beyond the six-month mark for the S&P 500 is 8.95%. Considering the soldiers are starting to file in behind the generals, a case may be building for a new bull market.

The number of companies guiding higher is declining and well below the last decade’s trend. The number of companies with positive changes in forward earnings is trending down currently, while the percentage change of the S&P 500 is heading up. Typically, price leads earnings, so this could support the case for a new bull market.

When going through the data, we see signs of life in equities. But we haven’t seen any true capitulation like we did during the global financial crisis. At that time, less than 10 companies had positive year-over-year percentage changes, which makes things look bleak.

Today, we’re seeing a nearly 50/50 split, with general companies like Apple, Microsoft, and Amazon leading the way. The NASDAQ is up over 20% this year and contains some of the largest businesses in the world. Now we need the soldiers to line up behind them and begin the march to new highs.

No matter which way the troops go, FPI’s dynamically risk-managed strategies have a plan

There are good arguments both for and against a bull market today, and depending on the day I could be persuaded by any one of them. That’s the importance of data-driven investing. Emotions show us what is going on inside, but investors and the finance professionals who help guide them are best served by holding fast to the data and investing unemotionally.

Helping investors take emotion out of the investment equation is something Flexible Plans Investments (FPI) has been doing for over 40 years. FPI’s quantitative investment strategies rely on rules, not human decision-making, to respond to market changes. So whether the troops of the market follow the generals or not, FPI strategies are designed to manage the risk and growth opportunities present in whatever landscape the market moves into next.

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