Investment Read Time: 4 min

Five for Friday - May 24, 2024

Market Breadth, Durables Inflation, Correlations, Emigration, and the Dow

1. Breadth

While concentrated markets have not historically led to bad returns, it is usually a sign of a healthier economy when breadth – the number of individual stocks and sectors that are doing well – is better (more legs supporting the stool, so to speak). And while there was some angst last year over heavy concentration in Big Tech stocks, the market has broadened out significantly in recent months. Per Finom Group’s Seth Golden, more individual S&P 500 stocks have a positive 1-year return than any point since early 2022. Every U.S. sector is higher over the last year, and abroad, 14 out of the 20 biggest country indexes are near all-time highs (via Bloomberg). The bull market is broad, and that’s a good sign.

2. Goods

A less-discussed area of inflation is durable goods (cars, furniture, appliances, etc.). Now, it’s less discussed for a reason – the purchases are less frequent and a smaller portion of most consumers’ regular spending. But they do matter. Pre-Covid, goods inflation was typically flat or negative as technology improvements and globalization drove prices down. The pandemic reversed that trend by sending shockwaves through our fragile global supply chains; durable goods inflation hit 18.8% in 2022, soaring past the highs of the stagflation 1970s. This began to normalize when the pandemic waned; in April, durable goods prices fell 3.2% from the previous April (the biggest drop in 20 years), and importantly for consumers, prices are dropping outright (deflation) versus rising at a slower pace (disinflation). While this won’t be the case for most of the economy, it is a positive for both consumers and the Fed as things return to normal.

3. Hedging

A staple of markets over the last few decades has been the negative stock-bond correlation. That is, typically, bonds would increase in value when stocks decreased in value (and vice versa). And while this relationship varied over time, it was still the bedrock on which most modern portfolios were built. However, in recent years, amid higher and more volatile interest rates and inflation, that relationship has reversed. Instead of acting as a hedge when stocks fall, bonds have tended to join the descent. In 2022, large-cap stocks and long-term government bonds both fell 15% or more for the first time in nearly a century (source: Ibbotson, SBBI). This phenomenon may not have happened much lately, but it was much more common prior to the 2000s and was the more standard state over the last century (source: AQR). All to say, if this change sticks and bonds no longer hedge stocks as well as they recently have, investors will be forced to adapt. This starts with more seriously evaluating other asset classes (international, real assets, alternatives, etc.) as diversifiers.

4. Moving

Recent analysis from Goldman Sachs (using census data) found that, across 2019-23, “the most urban counties (those in metro areas with a population over 1 million) experienced population growth nearly 1% below the pre-pandemic trend, while all but the most rural counties experienced above-trend population growth.” The shift away from city centers toward mid-sized communities was not just a Covid-19 flash in the pan—it’s continued through mid-2023. And while they note that this shift led to faster home price appreciation relative to large urban areas, other data show that new home construction is increasingly focused in lower cost cities in the first place (which will help keep housing prices in check over the long haul). The combination of flexible schedules, work-from-anywhere policies, and exorbitant cost of living increases in major urban areas seems to mean the dawn of the mid-sized city (especially in the Midwest and Sun Belt) is upon us.

5. Dow 40k

The Dow Jones crossed 40,000 for the first time ever last week. Now, the Dow is an imperfect index and round numbers are not all that important, but I have never been one to impede a party. To celebrate, I wanted to know if I would see Dow 1,000,000 by my retirement. While that might seem crazy, if the Dow returns ~9.6% annually (roughly average) and I work another 35 years, I will be writing about DOW ONE MILLION on the day I hang up the cleats. Pretty cool!


This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

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Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

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