Broker Check

I was asked by one client: Why is my account not performing as well as the markets i.e. S & P 500?

December 19, 2023

I was asked by one client: Why is my account not performing as well as the markets, i.e. S & P 500?

That may be a question on your mind as well. I admit that most of my accounts have underperformed the markets at the beginning of the year and have outperformed at the end of this year. So the question of why we did not keep up with the markets at the beginning of the year is a fair question. 

At the beginning of this year, the science of the market was not positive. Inflation in January was 6.4%. The Fed was threatening 4 more rate increases. Recession fears were high. We had fears of the war in Ukraine. Illegal immigrants were pouring into our country, costing millions. And the Federal deficit was increasing by 2 trillion dollars per year. In addition, the yield on the 30-year treasury was lower than the yield on the 6-month treasury. This is referred to as an inverted yield curve and means that interest rates are going up as predicted by bond trader activity. Bond traders tend to be better predictors of markets than stock traders. 

The preponderance of negative data kept me conservative at the beginning of the year. Yet the markets moved up over 10%. 

We did not. Since I invest based on the news, economics, and past history, I did not want to be aggressively invested. I stayed with a more conservative portfolio for all. I was out of tune with the markets but in tune with the science. There are rare times when the markets defy logic and go up despite the data. 

Above is a chart of the 10-year Treasury yield this year. The upturn in yield was caused by the Fed raising rates 4 times during the year. This is not a time to be aggressive in the markets. As you can see from the chart, as the Fed was increasing interest rates, 10-year yields moved up and continued to move up even when the Fed stopped raising rates. Notice that when we moved our accounts to a large caps and Nasdaq in October that the interest rates began to fall. The science was reinforcing our move.

The markets pulled back at the end of the summer with September the worst month. Looking at past history, September tends to be the worst month with October bottoming out but ending up. With interest rates down and inflation at 3% from 6% and recession fears ending, I determined that the bottom of the market would be October and that we would get a rally to the end of the year and begin a new bull market. I changed the portfolios so that we were predominantly in large cap stocks and Nasdaq. I was right.

Yes, I wish that all of you moved up at the beginning of the year, but I will not move inconsistent with the data that I follow and historical cycle. The risk is too high for the return and more times than not you will be punished for that kind of move.

We did not perform as well as the market this year, but we have moved up nicely at the end of the year. I suspect that the markets further move will be based on earnings reports which start coming out in the second and third week of January.

It is my job to protect you from market irrationality which I did. More times than not, that will save you from loses or make you money. My prediction is that the markets will be up 10% to 15% per year for the next 5 years and we will be invested to take advantage of that. Stay the course as a long-term investor and you will be rewarded.

"This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."