The Independent Market Observer

A Portfolio Manager’s View on Markets

Posted by Chris Fasciano

This entry was posted on Feb 22, 2024 12:10:12 PM

and tagged Commentary

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stock market tickerMost people know Yogi Berra as the Hall of Fame catcher and 10-time World Series champion with the New York Yankees. Many also know him as an unintentional philosopher, with famous quotations including “It’s like déjà vu all over again.” One Yogi saying I find myself thinking about frequently is this: “No one goes there anymore. It’s too crowded.” Here, Yogi was referring to a popular restaurant in Fort Lauderdale where the Yankees were having spring training. But it seems applicable to the conversations that we have daily. 

He just as likely could have been weighing in on what he had heard about concentration risk at the top of the market. Yet those stocks continue to move higher. Or he could have been opining on how everyone now believes that the U.S. economy will achieve a soft landing. Yogi might have been a contrarian investor.

What’s the Consensus?

These exact issues are part of our weekly in-depth discussions with strategists, portfolio managers, and colleagues across the Commonwealth Research department. In late 2022, the consensus view on the economy was that the Fed’s fight against inflation would lead to a hard landing. Equity and bond markets were under pressure. That view was wrong. 2023 was arguably the most telegraphed recession that never happened. When something becomes consensus, it increases the possibility that one data point can undermine the view. 

That isn’t a bad thing for investors when a worst-case scenario doesn’t play out. But when consensus becomes that the Fed will achieve the first soft landing in 30 years and markets respond accordingly? That disappointment might lead to increased volatility in markets.

The consensus view on the economy has been discounted in the equity markets in a very focused and narrow manner. Newscasts often cite the Magnificent Seven, made up of household names (Apple, Microsoft, Amazon, Meta Platforms [Facebook], Tesla, and Alphabet [Google]) and one that might not be (Nvidia). These are big companies with good stories about markets and opportunities, and investors have flocked to them. The rest of the market has not participated in the rally to the same extent. These other parts of the market tend to be names that are less well-known in the small- and mid-cap space. Their business models aren’t as mature as their large-cap brethren.

Dilemma or Opportunity?

The disparity in performance and what investors are willing to pay for different companies creates a dilemma and a potential opportunity for portfolio managers. The larger, fast-growing companies have strong business fundamentals, but they trade at higher valuation metrics. Most other companies have business fundamentals that aren’t as strong or, in some cases, are challenged. But their valuations are more attractive compared to historical averages.

Over the past 15 months and arguably for the past five years (except for a brief period in 2022), those large, fast-growing companies have been some of the market’s best performers. But things can change quickly. Perhaps a new restaurant opens down the street from Yogi’s crowded one. That happened in November and December when the rest of the market performed better than those well-known, well-loved companies that had been the market leaders. It didn’t last. At least this time.

A Fork in the Road

Yogi also said, “When you come to a fork in the road, take it.” Our crystal ball isn’t strong enough to know whether we are at a fork in the road for the markets or the economy. But that doesn’t mean there aren’t opportunities to construct equity portfolios that can weather whichever road is taken. 

We choose to navigate the uncertainty through balance and diversification. We believe there is a place in portfolios for large, fast-growing companies. But keeping an eye out for some of the underperforming areas of the market to balance the potential for reward while simultaneously helping manage risk is the path that makes the most sense to us.

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