Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Senior Investment Editor
Summary: The S&P 500 and Nasdaq indices are down with double digits for the year. Breaking them down reveals that there are industries and companies that perform very poorly, but also some that are surging. This points to two things - the strength of diversification and for the risk takers that there are returns to be found in the markets even though they are very sour at the moment.
Let’s be honest, 2022 has been a terrible time to invest. We’ve seen major stocks indices like the S&P 500 and Nasdaq tumble, and they are both with double digits for the year. Last Thursday we saw the Nasdaq take a massive hit as it tumbled over five percent. Falls like these can lead to the simple conclusion that everything is down, which to a certain extent is the truth. Because the beauty of working with data is that you can usually translate it to fit your narrative.
So, when you take a look at the two indices and compare their current price to its highest price within the past year (52 weeks specifically) only one company, Cerner Corporation (the American supplier of health information technology services, devices, and hardware) has a higher price now than at a previous time in the period.
However, if you look at the indices’ performance in 2022, then you can see that there’s a big difference between how industries and companies have performed.
If you focus on the S&P 500 on a sector level (all companies being equally weighted) you see that energy is up 47%, and thus is keeping the index afloat. This sector benefits from the surging energy and fuel prices with a company like Occidental Petroleum being up more than 100%.
On the other side of the spectrum the Consumer Discretionary has lost almost a fifth of its value as has Information Technology. Both areas are being heavily impacted by the increasing challenges with supply chains while the car industry specifically is being halted by the semiconductor shortage as well.
The worst performing stock is Netflix, which is dragging both indices down, as it lost almost 70% of its value since the beginning of the year.
While this may seem like data gibberish, there are at least two conclusions that can be drawn from this. The first – and most important – is that while the indices are down, they are perfect examples of the strength of diversification. Because investors who haven’t diversified (e.g. put all their money into a stock like Netflix) are so much worse off than an investor who has invested broadly in either of the indices. When you diversify your investments, chances are that something performs well, even when your darlings disappoint.
The second conclusion should be taken with a grain of salt and should not be seen as a suggestion to go wild in the markets. But, for the risk takers, there are companies out there which can give you a profit – especially in the commodities sphere.
No matter whether you want to go hunt for profit or diversify your portfolio, risk management is key to make sure you can execute your strategy comfortably and efficiently. To do so, take a look at this article, where investor trainer, Peter Siks, gives you seven ways to protect against market turmoil.
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