Despite a soft December, the U.S. equity markets closed the fourth quarter with a solid 2.4% gain. The benchmark S&P 500 generated a 25% return for the year. Slightly more than 1/5th of this return came from the semi-conductor design firm NVIDIA, which rode the artificial intelligence boom to grow into the second largest company in the index, trailing only Apple.
Like the comparably high equity returns seen in calendar 2023, the largest contributors to the S&P 500 index returns were the mega-cap technology stocks branded as “the Magnificent Seven”: Apple, NVIDIA, Microsoft, Google, Amazon, META and Tesla. These stocks grew faster than their underlying operating fundamentals as many of these companies are seen as major beneficiaries of the expected growth of artificial intelligence.
The past two years continued the strong trend of equities outperforming fixed income by a considerable and nearly unprecedented degree. These disproportionate gains leave equities trading at unusually high multiples of revenues, earnings and cash flow. By some measures the stock market is trading at such historically high valuations that these levels are surpassed by only the peak of the dotcom bubble in the late nineties.
We expect to see a high degree of volatility in financial asset pricing in the year ahead. Data relating to economic growth, job growth and inflation remains mixed; most recently data on both economic and job growth surprised to the upside while the Producer and Consumer Pricing Indexes came in below expectations. Bond yields have risen substantially since the Federal Reserve commenced rate cuts this past September, leaving investors questioning the need for further rate cuts.
Volatility is also likely given the potential policy changes floated by the incoming administration. Bond investors are anxious regarding fiscal, trade, and immigration policies articulated thus far. Such worries are exacerbated by the prospects of much higher public borrowings and persistent inflation owing to deficit-financed domestic demand, possible tariffs and rising import prices. Geopolitical concerns and the costs of dealing with increasingly volatile weather could also weigh heavily on global financial markets.
Given these concerns, we expect to mitigate risk by maintaining investments in high-quality companies with solid balance sheets and stable cash flows. In balanced portfolios we will hold fixed income securities in short and intermediate maturities.
The information contained in this communication is provided for general purposes only, and was prepared in reliance on independent, third-party sources that Fairview Capital Investment Management, LLC (“Fairview Capital”), an SEC-registered investment adviser, believes are reliable. Nevertheless, Fairview Capital does not guarantee its accuracy or timeliness of any information provided herein. The information reflects subjective judgments, assumptions and Fairview Capital’s opinion on the date made and may change without notice; Fairview Capital is not obligated to update this information. Nothing in this communication should be construed as investment or tax advice, a solicitation, offer, or recommendation, to buy or sell any security. Investment management services are offered only pursuant to a written investment management agreement, which investors are urged to carefully read and consider in determining whether such agreement is suitable for their individual needs and circumstances. The information in this communication should not be construed as an endorsement, recommendation or sponsorship of any company or security. If this post mentions a specific investment or security, we or our affiliates may have a position in that security (either long or short), and we may profit from a price change in that security.
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