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4th Quarter 2023 Market Commentary

2023 turned out to be a pretty good year after all. Assuming you had the right investments! The S&P 500 index went up 26.29% for the year. That’s a pretty exceptional year. The S&P 500 is actually up 3.42% over the two year period from 1/1/2022 to 12/31/2023. That’s not quite as exciting, but it’s a lot better than the index being down over the 2-year period. But that’s not the whole story.

The S&P 500 is not nearly as good a measure of the stock market as it used to be. The problem is the way the index is created. It is made up of the 500 largest US companies measured by market capitalization. Market capitalization is how much a company is worth as measured by the number of shares outstanding times the price of the shares. The problem with the S&P 500 is that the weight of a given company in the index is the weight of that company’s market capitalization in the total market capitalization of all the stocks in the index. That makes the largest stocks the largest part of the index.

This table shows the top 10 holdings in the S&P 500 index and comes from the website of State Street Bank, which offers SPY, one of the biggest ETFs tracking this index. The 7 largest stocks make up 28.5% of the index. Those stocks have done great in 2023 and that’s one of the reasons they now constitute so much of the index. These “magnificent 7” stocks went up 88.2% when I created a portfolio which includes them at the same relative weights as in the S&P 500. Of course, if you only invested in my imaginary magnificent 7 index, you would have a very undiversified portfolio.

If you took the Magnificent 7 stocks out of the S&P 500 index, the rest of the index would have only gained 8% for the year.

Does that mean these magnificent 7 companies actually did better than all the other companies? They are certainly some of the top performers, but when you look at a valuation metric, they seem quite expensive. The top 10 stocks in the S&P 500 have a forward price/earnings ratio of 26.9 (a valuation metric showing the price of the stock vs. projected earnings for the next year). The remaining stocks in the S&P 500 index have a forward P/E ratio of 17.1. The top 10 stocks (and certainly the top 7) are priced very high when you use the P/E ratio. So, the question you have to ask is how much higher can they go? What happens if their earnings don’t meet the forecasts? Do their concentration in the S&P 500 significantly increase the risk of the S&P 500?


We have to talk about inflation because the stock market is taking cues from the bond market right now and the bond market is being driven by what the Federal Reserve Bank will do with interest rates this year. Inflation has definitely been going down this year and has ended the year a little above 3%. The target for inflation is 2% as measured by Personal Consumption Expenditures (PCE), the FED’s favorite inflation measure. Although the target has not been met yet, inflation is going in the right direction (disinflation) and the Federal Reserve Bank has indicated it is done raising rates. The question is now when and whether the Fed will reduce interest rates. At its last meeting in December, the Fed forecast 3 rate decreases during 2024. That actually surprised me, because I think getting inflation from 3% to 2% could be harder than everyone thinks. The bond market reacted by reducing the intermediate and longer-term bond yields and drove the stock market rally at the end of the year.

But the bond market may have overreacted. The bond market has priced in 6 rate cuts in 2024, not 3 and that does not seem right unless we are going into a recession. It seems likely that the bond market will have to readjust its expectations. This might mean a rocky road for the stock market at the beginning of the year.

Investing Themes for 2024

Here are some of my expectations for 2024 in no particular order:

  1. Expectations for AI are slightly reduced. This might be driven by copyright lawsuits and misbehaving AI.
  2. The magnificent 7 stocks do not perform particularly well. The valuations are too rich.
  3. This drives the major stock market indices negative for at least the first part of the year.
  4. Intermediate and longer-term bond rates rise a bit, even if short-term rates are reduced by the Fed at least once. This will make the yield curve flat instead of inverted. At that point, it might make sense to slowly increase bond duration in your investment portfolio.
  5. The US does not go into a recession for another year.
  6. International stocks do better this year, especially non-China emerging markets.
  7. It will be a good year to have a diversified portfolio with value and small-cap finally performing better than large-cap growth stocks.
  8. The stock market does not really care whether a Republican or Democrat is in the White House, but sometimes there is a reaction right after the election. The stock market does tend to go up in election years an average of 11.58% according to First Trust. The stock market has gone up 83% of the time during presidential election years, so it’s not guaranteed.

I am happy to discuss my expectations with you and/or have a healthy respectful debate. I have no illusions that I will be right in my predictions and unexpected events can change everything. I always write here that you should be focused on the long-term. A diversified portfolio which matches your risk tolerance is the key to long-term investment performance. Feel free to contact myself or Mike to discuss at any time. Data presented here are from sources that I believe are reliable, but I cannot guarantee they truly are. Please see other disclaimers on the Cereus website at

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