Tudor June 2023 Commentary

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Market Snapshot

June 2023

The Size Factor is Driving Markets in 2023

So far, so good. Markets are regrouping at the halfway point of 2023 after a challenging twelve months in 2022 - a tough year for all asset classes.

The low point in this market cycle is now far behind us. The S&P 500 hit a 3,492 index low on October 13, 2022 nine months ago. (How many bought at that time to take advantage of attractive prices?)

Migrating through the mid-year point, we see markets trading around 28% higher than the 2022 lows.₍₁₎ Quite a recovery.

In 2022, scary world news chased out weak investors, as it often does, hence the low point in October last year. Panic selling during much of the last few years has not been profitable as the S&P 500 trades within single digits of its all-time high.₍₁₎

What Now with the Fed Pausing?

The Federal Reserve is pausing its interest rate campaign based on signs the economy is slowing. This is evident from a slight pullback of consumer spending (which oddly enough includes claims that more top income earners enough are shopping at dollar stores(?).₍₅₎ Higher rates dampen valuations of all assets, including real estate, and, as noted below, this has had an effect on real estate sales in the last year.

Markets are Heavily Concentrated This Year

Markets are more concentrated in 2023.

There is some quirkiness to the S&P 500 index returns generated this year - nearly all of the 2023 return of this index through the end of May came from less than a dozen securities. If you didn't own them, you were likely flat to breakeven through the fifth month of the year. It's an interesting phenomenon...nearly 100% of the S&P 500's return from a mere 2% of its components. Investment history folks are suggesting it reflected the most concentrated market they've seen. The top ten largest are all the obvious companies: Apple, Amazon, Microsoft, Google, Tesla, etc.

Historically, the top ten largest stocks in the S&P 500 contribute about 5% of annual returns.₍₃₎

Our impression is that, as with everything market-related, there is a regression back to the mean (the norm) as the year progresses. The euphoria over the biggest stocks (and artificial intelligence mania that occurred last month) will ultimately wane. The point at which regression actually occurs is outside of our crystal ball jurisdiction.

97%

The percentage of 2023

S&P 500 YTD returns

driven by the top ten largest stocks₍₃₎

Through 5/31/2023

America is falling short on the savings front. This conclusion is based on an evaluation of 5 million savers in the How America Saves - 2023 report updated annually by Vanguard, a study that details the behavior of millions of retirement account savers.

There are several key takeaways from the report, including:

• The average employee savings rate is 7%
• With employer contributions/matching, the savings rate rises to 11.3%
• 50% of participants have a balance above or below $27,376 (median balance)
• The average balance is $112,500 (long-term employees tend to skew the average well above the median balance)
• Women trade 30% less than men, but also hold more lower-returning asset allocations
• 83% of participants invested in target date funds which automatically move investment allocations to cash and bonds (becoming more conservative) over time until a specific target year is reached

There is room for improvement all around:

Performance challenges:

• The 5-year return for the average investor was 5.1% annualized. The return for the S&P 500 during the same timeframe was 9.4%, which translates to an 84% better outcome than participants themselves achieved (recognizing that not all investors want higher growth)
• Those that delegated their accounts to robo-advice received no performance benefit at all. In fact, the Vanguard robo-managed service brought 5-year returns down to 5.0%
• Target date funds, with 5-year returns of 4.8%, produced the lowest outcomes

Targe date funds:

There are a number of reasons we are not fond of target date funds, reasons we have elaborated on in prior communications. These funds are oversold and provide misguided comfort to investors. However, the regulatory environment favors them and employers are largely required to offer them despite their drawbacks. These misused funds are holding back retirement preparedness for many employees.

Room for performance improvement:

Current employees are struggling with performance. The average account fell by 23% in 2022 (including contributions) which was significantly worse than the S&P 500 decline in 2022. This is an area where delegation to professional systematic management can improve outcomes.

Savings rate improvement - another 4% will do it:

Savers may benefit from additional guidance (or a little nagging). The retirement study actuaries calculate that employee savers can greatly improve their probability of success in retirement - get to where they should be - by increasing their savings rate by 4%.₍₄₎

How to Calculate 401K Returns

We commonly see errors in performance calculations done by individual investors. The investment industry has strict standards for presenting performance information.

Remember that calculating annual 401(k) returns must factor in the contributions made during year to avoid counting them as a part of the return.

To calculate a one year return from a 401(k):

1. Subtract all contributions made during the year from the year-end balance (creating a net year-end number)
2. Find your beginning of year balance. Subtract your beginning year balance from your end of year balance that backed out contributions from Step 1
3. The difference between them is your dollar return for the year
4. Take your dollar return for the year from Step 2 and divide it by your beginning year balance to calculate your percentage return for the year

401(k) savers commonly overstate their returns by not backing out contributions made during the year, and also misstate returns by not using the beginning of year balance to do the percentage calculation noted in Step 4.

Interest Rates

Having an Impact on

Home Prices:

3.1% Decline in May from Prior Year

May marked the fourth straight month of annual home price price declines, something that hasn't happened since 2011. The most recent May decline of 3.1% follows an April decline of 1.7%. The biggest declines are occurring in the western half of the U.S.

Mortgage rates are still hovering in the 6% range after peaking at 7%₍₁₎ last October and November. Elevated home prices combined with higher interest rates have tamped down demand from buyers. Part of the reason that sales have slowed/prices have declined is that existing home owners are happy to stay put and enjoy the benefits of their existing mortgage rates of 3% on homes that were purchased at reasonable pre-COVID prices.

In January 2020, the median home price was $290,499. At a current median price of $419,000 in May 2023, home prices are 44% higher.

The biggest year over year declining cities?

Austin, TX - down 15.1%

Boise, Idaho - down 14.3%

Oakland, California - down 11.2%

Source: wsj.com, Higher Interest Rates Hit Home Prices Again, June 22, 2023