Meanwhile, the S&P 500 is on track for its ninth straight week of gains and, as of Thursday morning, is up more than 24%. It finished at 4,783.35, putting it close to its highest closing level of 4,796.56 set in January 2022.
Every other major index is also on track for a strong finish to year of solid gains. The Nasdaq has outpaced the broader market and is up more than 44% for the year.
We spoke with two local experts, Scott Simons, a financial adviser with Ridgeline Wealth Planning and Mike Fink of Raymond James, about the state of the market and what people should be doing to stay solvent in it. Here’s what they had to say.
Q: What’s behind the surge and how has it affected stocks in different sectors and industries?
Scott Simons: “The Fed’s definitely finally moving less hawkish and there’s a strong likelihood that next year, the next move for rates is actually down based on the Fed’s own projections. So this allowed the markets to exhale as it has been holding its breath for a while and the tech sector has been a large beneficiary of that this year, the NASDAQ surging (more than 44%) and it’s certainly been a profitable place to be. Certainly the Magnificent Seven, which are seven of the largest tech stocks, have been a huge benefactor.
“The nice thing is, for ordinary investors, if they’ve got exposure to the S&P 500, your percentage that actually falls into that Magnificent Seven is pretty significant. You’ve actually got 28% exposure there to your Microsoft, Apple, Amazon, Nvidia, Google, Meta and Tesla, so those stocks have really rallied with the outlook towards lower rates.”
Mike Fink: “The most recent surge, which brought the S&P up around 16% off of the October lows, has mostly to do with the Feds dovish policy tone. The market sentiment has shifted from higher for longer to steep cuts due to the economic uncertainty. Earlier this year, what drove stock prices higher was the hype surrounding artificial intelligence.
“A lot of people think that we’re on the front edge of what many people referring to as the fourth industrial revolution, so that’s what has driven the market here, recently.
“This recent momentum does bode well for stocks in the year ahead. Given the magnitude, the recent run up, you can expect some correction and consolidation, especially this election year. That’s historically been kind of a volatile time for stocks.
Q: What does the news mean both for active investors and retirement plan participants?
Simons: “We encourage our clients to invest for the long term and not get caught up in the day-to-day or even the month-to-month events, but that doesn’t mean we bury our heads in the sand. We’re not trying to time the market based on short-term events. However, historically, over long time periods, investors are going to be rewarded for staying patient and invested. The power of time in the market, not timing the market, cannot be emphasized enough. We want to be invested over decades, and not just days.
Q: As more and more everyday workers have 401(k)s, affecting the balance of money invested, has that affected how the market works?
Fink: The Investment Company Institute says there’s about $10.2 trillion in employer based retirement plans, and of that, $7.2 trillion are in 401K plans, so yeah, they have a big impact on the market.”
Simons: “That’s a great question. So the exact impact of those 401k flows monthly is difficult to quantify and we also know the capital markets in the U.S. are extremely efficient. Clients who are investing in 401Ks regularly, they’re benefiting from that company match and they’re going to do historically very well. You cannot beat a 50% to 100% match right out of the gate in any other investment, so it’s really important for people to take full advantage of that company match.”
Q: Do you think most retirement plan investors in their 20s to 50s look at their plans much or adjust their investment mix?
Fink: “It’s been my experience that people who sign up for 401K plans early in their careers, they sort of set it and forget it, and that’s given rise to a lot of these target-date funds. You know, that people will say, ‘OK, I’m planning on retiring in 2030 or whatever, and they have these target funds, that it’s sort of a ‘let the professionals do it for you.’ But as people get closer to retirement age, they tend to monitor those investment selections a little closer. That’s been my experience, and that’s when they tend to come to my office.”
Simons: “For the most part, many do not. However, this can actually be a strength. They’re not swayed by the month-to-month vagrancies in the market. They don’t move their equity exposure up and down constantly. It does make sense to ... look at your retirement picture once a year just to see where you are in relation to that. We want eventually work to become optional for you.
“One of the best things retirement plan participants could do is, there should be a little box they can check to automatically increase their annual contribution by 1% a year on many of the larger plans. That’s massive because if they start at 6%, slowly they’re going to 7%, 8%, 9%,10% and that’s a huge benefit for them, and if you can time it up with your raise, it’s even better.”
Q: Stocks soared from 2016 to 2020, cratered during the pandemic, bounced back and soared from 2020 to 2022, then had been pretty mediocre for 20 months until recent weeks. What is your long-term look at the health of the investment markets?
Simons: “Over the last 10 years, we’ve seen the worst inflation of the the last 40 (years), to the challenges of COVID, we’ve seen the market and the country navigate through some significant disruptions. However, in spite of all this, we’ve still seen the S&P average nearly 12%. Companies are continuing to innovate and grow and through owning stock, you’re able to participate. So we’re bullish on the long term. When I think of long-term, I’m thinking 10 years or more, I think health of the markets are great. We’ve got some fantastic U.S. companies who are growing by leaps and bounds and through owning stock, clients are able to participate in that.”
Fink: “Bond prices and yields are inversely related, so people who had bond investments last year got crushed. The cost of capital was virtually zero for over a decade, and so now we’re kind of coming back to normal costs of capital. Bond yields are just now coming off of 16-year highs. Back in October, the 10-year Treasury, which is kind of a benchmark, was at 5%. Today, the 10-year Treasury is just under 4%. As interest rates on the short end, continue to decrease, bond investors are likely to see pretty solid returns.
“Historically, when we have this inverted yield curve where short-term rates are higher than long-term rates, eventually as the economy starts to slow down and we get into that economic uncertainty, rates on the short end come down.”
The Associated Press contributed to this report.
BY THE NUMBERS: Year-To-Date returns*
S&P 500: 26.58%
Dow Jones Industrial Average: 16.08%
Nasdaq Composite Index: 45.47%
* - as of Wednesday, Dec. 27, 2023
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