By: Russ Kamp. Managing Director, Ryan ALM, Inc.

Like everyone else, I get a ton of emails regarding various markets and the associated performance. Just got one that spoke to 2023’s surprising equity market strength versus 2024’s concern about recession. First, in 2022 market participants were talking a lot about 2023 being the year of the recession because the Fed had already gone too far. So much for that expectation. But back to 2023’s equity market strength. Is it really a strong market or one that is dominated by just two handfuls of companies?

In an analysis by Gen Eagle Trading, they mentioned (11/6) that “the 10 largest companies by market cap have been responsible for 96.5% of the S&P 500’s return in 2023. This is unprecedented. For example, the ten largest companies have had an average annual contribution to the S&P 500 of 29.8% in all positive performance years from 1993. Given the fact that institutional US equity managers tend to build equal weighted portfolios favoring more value factors, it is highly unlikely that “active” managers are even close to matching the performance of the S&P 500 in 2023, continuing a trend that has seen active management struggle for 20+ years.

So, I repeat, when only 10 stocks that are not likely held at similar weight as that of the benchmark so dramatically outperform leaving the remaining 490 companies to generate only 4.5% of this year’s gain, is it correct to say that 2023 has been defined as a strong market environment for equities? For instance, the capitalization weighted S&P 500 is up 10.7% YTD through October 31, 2023, while the equal weighted S&P 500 is at -2.4%. The level of underperformance by small cap value (R1000V -6.5% YTD) has been unprecedented. With the exception of 2022, large growth (R1000G +23.2% YTD) has dominated the equity markets. Is it sustainable or should plan sponsors begin looking to migrate equity assets to small value?

Better yet, given the uncertainty of Fed policy going forward, it might make more sense to take profits from the S&P 500-like investments with all of its concentration risk, and migrate the proceeds to US bonds that can be used to create much greater certainty through a cash flow matching implementation that will secure the promised benefits chronologically as far out as the allocation goes. The current US interest rate environment is providing a gift to plan sponsors at this time. Take advantage of it. We didn’t do that in 1999 and have paid the consequences since.