Barring something unexpected occurring in the final hours, it looks like the government will manage to avoid defaulting on its outstanding debt. It was always extremely unlikely that this would actually happen, but there was just enough wrangling over the past week to make it a non-zero possibility.
Despite some similarities to 2011, the markets mostly treated this episode as a non-event. Treasury bill yields briefly spiked and credit default swap prices are still elevated, but stocks and bonds barely reacted and volatility remained low. Long-term Treasury prices have fallen over the past month, but that has more to do with inflation and the Fed than anything.
With that cloud of uncertainty likely behind us now, are short-term conditions back to favorable? AI mania is running wild. The Nasdaq 100 is up more than 30% year-to-date. The recession narrative continues to build slowly, but nothing appears imminent. The VIX is still near 2023 lows. It sure looks like we’re back in a new bull market, right?
Not so fast!
One of things that I continually emphasize is that when an investor says “stocks are up”, they need to ask themselves which stocks they’re talking about. A true total U.S. stock market ETF will hold around 4,000 different positions. Most people, at best, only talk about the S&P 500, which is just a fraction of the total market (and that doesn’t even consider international equities). In 2023, most people are only looking at the FAAMG names or the “Magnificent Seven” as I’ve heard some people call it - Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla and NVIDIA. Each one of those stocks is up more than 35% year-to-date in 2023. NVIDIA and Facebook are up more than 100%. Since those seven stocks comprise more than 50% of the Nasdaq 100 index, it’s pretty easy to see why it’s up more than 30% right now.
But what about the other S&P 493? Unfortunately, they’re telling a much different story.
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