Given the popularity of our weekly Market in Pictures, we thought it made sense to pick out a few and go into more detail with our PMs. In this edition, Dave and Brad will spend a few minutes on each of the following:
- History of 1st Half Strength in Equities
- Election Impact on Stocks
- Artificial Intelligence (AI) and Market Impact
Hope you enjoy, and please send a note to [email protected] if there’s a particular chart/topic you’d like to see covered next month. Time to swing it around!
3 Minute Read: Executive Summary
Full Transcript
Derek
Good afternoon, June 4th here. You may see a new face on the screen. Always have a good time with Dave Wagner and John Luke. But John Luke’s taking a rare vacation, and so one of our other PMs, CFA Brad Rapking, stepped up to hop in. So we’ve got our Cincinnati connection gear back together. So thanks for being on, guys.
Brad
It’s big shoes to fill.
Dave
Cincinnati rolling strong.
Brad
That’s right.
Dave
Yeah. I have a feeling since Brad’s on here. Well, for those that don’t know him, we call him Brad GPT. I have a feeling we’re going to have a lot of data being tossed at us with probably some of these charts and I like it. Facts.
Derek
He will definitely bring the facts, so I’ll start with my disclosure. The opinions expressed during this call are those are the Aptus Capital Advisors Investment Committee and are subject to change with without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus’ investment advisory services can be found in its form ADV part two, which is available upon request.
So as far as May goes, it was good month. April kind of broke the street, but May got it all back. We’ve been bouncing around a lot more of late, but I guess I’ll let you roll into a little may recap.
Dave
Yeah We definitely had April showers in last month. I mean, luckily everyone on this call survived the Great Bear Market of April 2024. That’s all peak to trough drawdown of 5.91%. It just shows people kind of a great reminder that pullbacks are healthy, that the market just simply cannot go up every single day. In fact, pullbacks happen three times, or a 5% pullback, pardon me, happens three times on an annualized basis and one 10% pullback on an annualized basis. But this month, April, that was really driven by the expectation of no rate cuts occurring in 2024 is really what drove the market back in May.
But if we’re obviously talking about May here, the linchpin or the flint to the fire that drove this bounce back for the S&P 500, it was earnings. And I feel like it’s just been something to happen on a quarterly basis there with the last seven earnings report is that the market expects earnings to come in a little bit weaker than anticipated. But the resiliency of corporate America just continues to show its face. And that’s exactly what happens in the first quarter of 2024 for earnings results. And the S&P 500 definitely showed its face bouncing back almost 5%.
I think the NASDAQ was up 6%. Small caps, more quality small caps underperformed, international underperformed. Continue to see a lot of the correlation with fixed income and equities, fixed income bounce back this month. And since Brad’s a newbie on this call, I always try to give John Luke some random trivia out of left field. So Brad, I’m going to toss you to the wolves pretty pretty quickly here. Without looking at this chart, Brad, what do you think the five year annualized performance number for the Barclays Ag is?
Brad
I’m guessing it’s not much.
Dave
You’re guessing right.
Brad
Is it less than zero?
Dave
It’s slightly less than zero. When I was putting together this chart, that’s really the number that stuck out to me the most, that over the last five years, fixed income has had a negative annualized number. Even if you go out to 10 years, fixed income as measured by the US Barclays Ag is only up like one and a quarter percent on an annualized basis. It just shows that this drawdown that we’re seeing within fixed income, especially what happened in 2022 when fixed income was down 13 and some odd change percent for 2022, and just year to date Barclays Ag is already down 1.6%.
It just shows the bad math of drawdowns, especially within fixed income. Yet fixed income just doesn’t have that growth driver to get back to where it was previously unlike stocks. I mean we all know the bad math of drawdown, you draw down 10%, you got to have 11% to get back. And when fixed income just doesn’t have the levers to pull like stocks do after a substantial drawdown that it’s seen, it’s really hard to get back to zero. And we all know that kind of buys into the entire philosophy here at Aptus of more stocks, less bonds remaining risk neutral to really attack one of the biggest problems that we see at the portfolio level.
And that’s just longevity risks, which is accidentally injected into portfolios by over allocating to fixed income.
Derek
And that’s a nominal number. That’s not even factoring in inflation.
Dave
Exactly.
Derek
That’s terrible.
Dave
That’s a little bit of John Luke coming into this call here talking nominal yields and real yields. I like it.
Derek
Doing my best. So all right. So, it was obviously a good month. It’s been a pretty good year. There’s temptation out there to forget all the worries that are out there and just think about, hey, S&P’s up 11% for the year. What does that mean for the rest of the year? Should I just relax a little bit, T-bill and chill as was coined last year? But I guess you might have something to say about how that has historically ended up after you had strength in the early part of the year.
Brad
And this is a graph that perfectly exemplifies that. And what the graph is showing here is that there’s been 21 instances since 1950 and when the S&P is up more than 10% in the first five months of the year, that’s going to be the dark blue numbers there, the median and average returns for those five month periods. And while if you look at what the market’s done historically the next seven months of the year, it’s actually been positive and quite positive with strong returns on both sides, both median and average. And I think what’s even more important to look at there is the hit rate.
And so we’ve actually only had two of the 21 periods historically where the market ended the year of those last seven months being negative. So that means over 90% of the time or nearly 90% of the time, you’ve had a positive return for the remainder of the year. And then the other part is just the magnitude. So looking at the median performance in the years in which the market’s up greater than 10 through the first five months, you’ve had the last seven months return about 8.1%. And then all other periods where the market isn’t up that much, it’s returned just 5.4%.
So while obviously markets tend to have a bias upwards, when we’ve seen this type of environment to start the year, it tends to be even stronger than history would suggest.
Dave
Well, it might have been underplaying the amount of data Brad GPT was going to come to this call on. That’s some great data. And to kind of coincide with that, Brad, we always talk about in our asset allocation presentation, the kurtosis or the fat tails of the left tail and the right tail. But we added that new slide to the asset allocation presentation that shows annualized returns of the S&P 500 and how it’s skewed. There’s a lot more kurtosis or fat tails on the right side and that I think it’s like 60% of the years since 1927 have posted a return greater than the average annualized return for the S&P 500 during that period.
And it just shows that those right tails are very fat and that strong performance tends to be even stronger performance. And that’s what this slide is showing just in a more simplicity.
Brad
So Dave, you threw me a trivia question. I’m going to throw one back at you. So of the two years, I’ll give you one. It was 1986 and the market the last seven months was down 10 basis points. What was the other year and do you have any idea the magnitude of the drawdown for the remainder of the year?
Dave
I’m blind on this one.
Brad
Once I give it to you, you’ll see how it’ll be easy in hindsight once I give it to you.
Dave
Well, now you’re going to make me look like an idiot in front of everybody here.
Brad
My first time I have.
Derek
Brad just came in and threw down the hammer.
Dave
I’m going to go with, man. I am going to blank on this one. I’m going to go with, it’s going to come out COVID or something like that and I just don’t … No, I’m going to go 2009.
Brad
Not a bad guess, but it was 1987, if you remember-
Dave
The next year.
Brad
… October of-
Dave
The crash.
Brad
… ’87 wasn’t too friendly for markets and so it was down over 13 percent.
Dave
October 13th, I should have.
Brad
That’s right. Yeah. So 1987 was really the only year where you had a significant negative return the last seven months of the year after the strong start.
Derek
And none of that came until the fall. It wasn’t like you just dropped off the face of the earth the next month.
Brad
Exactly. Exactly.
Derek
All right.
Dave
You stumped the Schwab. He passed away I think two months ago, if anyone remembers that ESPN show.
Brad
That’s a deep cut.
Dave
That is. Ain’t it?
Derek
All right. So that said, this does kind of roll into your next graphic that you had in the monthly top three. So all that said, this is an election year. It’s starting to get a little more into the news. I mean, everybody obviously knows it’s an election year, but market-wise, should we care?
Dave
I mean, the market knows it’s an election year. I mean, if we look at the data that whenever the president or the incumbent is running for reelection, the market tends to have a very strong year with an average return of 16%. Year to date, we’re already up 11%, so the market does know that it’s an election year. But if you hear that, there’s a connotation that if the market knows it’s an election year, probably someone’s going to go straight to, well, the market was down, or probably more likely there was a lot of volatility that year.
But in fact, it’s the exact opposite. The market knows it’s an election year, that we’re probably going to get a little bit more fiscal stimulus, much like what we saw during the third year of the election cycle. Tends to continue into the fourth year of the election cycle. And current President Biden has multiple levers to pull to really increase the liquidity in the market through multiple different levers. So whether it’s at the TGA account or forgiving student debt, very sundry, reverse repo, anything on that side.
President Biden has a lot of different levers to pull to increase the liquidity in the market from a fiscal standpoint. So it shouldn’t really surprised people that we are having a strong year here in 2024. So, I think the statistic is that … Actually, Brad, I’m coming at you after that last one. There’s been three years, three years since 1944 when the S&P 500 index was down during election year. What were those three years?
Brad
Well, I had them in my notes to talk about today, so we’ll go with, oh, I have two of them at least 2008, 2000, and I don’t know the last one.
Derek
1960.
Dave
John F. Kennedy. Bam, Derek. Teamwork makes the dream. That’s exactly right.
Derek
Only because I think I’ve heard you ask that before.
Dave
Well, all right. Let’s think of what brings those three years together. 1960 JFK, 2000 Bush, and 2008 Obama was that there was not a president running for a reelection. There wasn’t an incumbent there. And so that’s what makes this statistic so fun and cool in my mind is that whenever there has been an incumbent running for president, the S&P 500 has had a positive return with an average return of 16% since 1944. I think the other coolest statistic, and it’s one that I’m watching right now, is that whenever there’s been a recession in the two years preceding election, the incumbent has not won that reelection.
As of right now, President Biden is the candidate on the ticket, and as of right now, we haven’t had a hard landing or recessionary environment in the two years preceding the election right now. So I’ll stop with stating that being the pseudo Washington, DC analyst here at Aptus, I’m going to be putting out a few musings, probably my first one in the next week or so. And I’ll probably come out with maybe one each month leading into the election that y’all can utilize and white label for your clients.
And I’ll keep opinions and politics out of it, just facts and market commentary in regards to the election.
Brad
Yeah. And Dave, hopefully I don’t steal some of the thunder of the numbers you’re going to be putting in those musings. But I think it’s also important just to look at, just to Dave’s point where I think we’ve had some clients say that anecdotally they feel like volatility tends to be higher in election years. And we ran the numbers just to see what that looks like historically. So since the S&P in 1928, we’ve had 24 election years in terms of volatility. So the average standard deviation for those 24 election years tends to be 16.26 for the S&P where all other non-election years tends to be averages about 16%.
So really not a significant increase in volatility on a standard deviation basis from that perspective. Then if we actually look at the hit rate in terms of the percentage of the time the market’s positive in election years, it’s been 20 out of 24 election years have been positive. It’s good for about an 83% hit rate. And then if you look at the 72 non-election years, the market’s positive about 70% of the time. So on average, you’re actually seeing more years positive in election years than non-election years.
And then the other period where, or the other number that I have here looking at just average returns in non-election years versus election years actually tends to be stronger in non-election years at about 11.6%, whereas election years tend to average around 11%. So not a significant difference, but it is a little bit stronger. But I think to that point, Dave, the numbers really don’t bear out that you see a lot higher volatility in election years.
Derek
You just see higher emotional volatility from investors. It does bring up a point as you guys roll through this, I will offer both of you up as if anyone wants to do a video for clients. To me, they’ve been very, very useful. Advisors love it where you just do a 10-minute video if you get into the summer fall and clients are just kind of antsy. I mean, we know the stats don’t really bear out that they should be antsy, but if they are and you feel like it would be useful to send out a 10-minute video, like load us up.
We’ll bring the guys on, we’ll do a short video and you can blast it out to clients. So definitely something-
Dave
Great idea, Derek. We did that a few times in 2020 and it was very well received. So yeah, everyone on this call, please utilize us for that.
Derek
So one more chart here, and this is going to require some explanation I think on the specifics, but really part may and part of the last year has been Nvidia, everybody’s obsessed with Nvidia and AI as a whole. And so you guys put this graphic in there this month that just shows the timeline of AI, and there’s a whole lot of chatter out there, but maybe you guys can dig in a little bit on what actually matters to investors. So they’re not going to go out and just load up on Nvidia at this point, but how can they benefit from what’s an obvious trend?
Brad
Yeah. Yeah. And first it’s been a very common question our clients is how can we capitalize on AI? And so in general, I think what we’re trying to show in this chart and across the board is just own more stocks. All these different equities have a potential to take advantage of AI. And looking at a couple stats, US companies in 2023 invested about $67 billion into artificial intelligence, which is a 22% jump over 2022. But despite that, the US Census Bureau did a survey and only 3.9% of the companies in the US actually were utilizing the technology.
So I think there’s still a long runway for growth across the board, and that doesn’t only include the Nvidias of the world, it’s going to be these other companies that can increase the productivity of their labor or displace some of that labor and reinvest back into their business. And that’s what the graphic here is showing is it’s a little bit of a dated chart, but it’s Goldman graphic from around this time last year where they’re estimating based on the amount of investment and the time people are giving for the investment to take place, the potential impacts of artificial intelligence.
And you can see that the greater the investment and the more amount of time people are focusing on it, they think just given again the increases of productivity of their current workforce, it could be pretty massive. And you take a 2.4% bump in productivity and annualize that over a 10, 15, 20 year period can be very significant to economic and earnings growth.
Dave
This is one of my biggest takeaways from earning season. And if you read my musing on the earnings recap, this would be nothing new to you. Obviously earnings came in very strong, but I think what really caught my eye was everyone knew the magnitude of CapEx spend that would incur into AI, but a of investors didn’t expect the magnitude of the revisions from original expectations of CapEx spend going into AI. And in this space, there’s going to be just a few winners in my opinion and a lot of losers.
And that’s why we attack this AI question on how we can benefit from it at the asset allocation to Brad’s point of just simply owning more stocks and less bonds. Because if AI really takes off and it’s really just the evolutionary not revolutionary, so the evolutionary change that we’re all expecting, all stocks are going to benefit from it because we all know that the S&P 500 is becoming more concentrated. The top seven holdings are like 28% of the benchmark now. But those top seven companies, they’re spending $328 billion in CapEx this year.
Relative to the remaining 493 stocks, that 328 billion is three times greater than the aggregate amount of CapEx spend by the other 493 stocks. So that’s why in this, my opinion here, is it going to be a winner take all in this space? Might be close. Might be close. Because the aspect of the operating leverage that technology can do for certain companies, that’s not going to slow down by any means, especially as they continue to ramp up their spend. But that’s why I really want to attack this question on how we can benefit from AI at the allocation side.
Because I think a rising tide will lift all boats at the index level as the productivity to Brad’s point really starts to play out through margins.
Derek
I think also on your point, Dave, you’ve written about asset light, the asset light model and how that’s supported valuations and how that’s basically helped the US versus the rest of the world as far as how we’ve performed. And it would seem like this would just play into that even more. It keeps profit margins nice and fat, maybe even fatter, and companies can have even lighter assets.
Dave
Yeah. I mean, we could take this conversation a slew of different ways just comparing the S&P 500 domestic index versus the international side. But let’s just focus on the S&P side of things. If you go back to 1980, I think it was about 90% of the assets on the aggregate balance sheets of all the S&P 500 companies were on tangible assets. Fast-forward to today, 44 years later, it’s about 95 or 96% of the aggregate assets on the balance sheets of S&P 500 companies is their intangible assets now. And said another way, that just shows that we’ve gone from a very capital intensive industrial manufacturing market to really more of a capital asset, light technology based environment market ecosystem.
And once you really start that change, the valuation description that you’re going to get from the US versus internationals only going to continue to expand. But alongside that, there will profit margins. And we know that as profit margins are growing, it’s really hard for a market to get in trouble from a performance standpoint.
Derek
Awesome. Well, guys, I think that’s a great recap of May. I’m sure we’ll have more in a month. I don’t know, Brad, maybe we’ll get you back or get you in the rotation for every other month, or maybe we’ll add you to the regular-
Dave
Hard shot.
Derek
Yeah. But it’s been great having you. I appreciate you stepping in.
Brad
Absolutely. Glad to hop on.
Derek
Awesome, guys. We’ll send this out and talk to you all soon. Peace.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2406-8.
