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For All The Talk Of Rate Cuts, Little Talk Of Halting Balance Sheet Runoff

by Fortem Financial December 11, 2023

Lately, there has been much discussion about how soon the Fed will have to cut rates as many believe they are too restrictive. While we are cautious about the ultimate message rates have for equities, we are even more concerned about how little balance sheet runoff is discussed in the context of cuts. If we look back to 2019, the last time the Fed began cutting rates during balance sheet runoff, the runoff lasted just a few more weeks before the Fed ultimately had to reverse course due to repo market strains.

All Federal Reserve Banks Total Assets ($BN)

 

Worst Relative Year For The Average Stock Since 1998

We’ve covered the narrow market leadership that’s been observed in our work extensively throughout the year but thought it may be important to provide context for just how tough it has been for the average stock. Using the S&P 500 equal weight index as a proxy for the average stock, this has been the worst relative performance year to the cap weighted index since 1998. It should be noted that the equal weight index underperformed handedly again after this in 1999 but then went on to outperform the cap weighted index for almost the entirety of the 2000s.

S&P 500 Equal Weight Relative to S&P 500 Cap Weight

 

Modest Outperformance From The Average Stock Recently Should Help Active…

With narrow performance, predominately domiciled within the Magnificent 7, active managers have had a tough run in 2023. The S&P 500 equal weighted index has underperformed the market cap weighted index by roughly 1200 bps. On a positive note, the average stock has made up some ground since mid-November on a relative basis, roughly +300 bps, which should aid active managers who have fallen behind their benchmarks.

S&P 500 Relative to S&P 500 Equal Weight YTD

 

…But A Tough Year Overall For Active Given The Concentration In The Market

Last year active managers did significantly better based on the data we track but this year they have reverted back to the percentage of outperformance seen during the Q.E. era. At 23.9% of large cap core active managers outperforming, it speaks to the challenges managers face when such a large portion of the index returns is attributed to just a few stocks. One has to go back to the late 1990’s for a comparable period to when the market weighted and equal-weighted index differed so significantly.

Annual S&P 500 Performance vs. % of Active Managers Outperforming

Source: Strategas

 

Market and Index Changes for the Week Ending 12/8/2023

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

 

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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