2023-Fourth Quarter Review
Equity investors were rewarded in 2023 with favorable returns. The Dow Jones Industrial Average (DJIA) was up 16%. The S&P 500 Total Return Index (market capitalization weighted index) was up 26%, and the S&P 500 Equal Weight Index was up 14%. Despite inflationary pressures and conflicts in Ukraine and Israel, the markets closed the year near the all-time highs established two years ago.
The large disparity in the two S&P 500 Indices is because seven stocks constitute 28% of the market capitalization weighted index. Stocks that comprise the index have a percent contribution based upon market capitalization. Those stocks (Microsoft, Apple, Alphabet, Amazon, Nvidia, Tesla, Meta Platforms) have led the market with extraordinary growth. While we own many of those stocks in client portfolios, we typically avoid concentrated positions. Broad diversification is a long-standing discipline at Penobscot. The disparity has been a phenomenon unique to the past year. Over time, the two indices have been closer in their returns. Over three years, the market capitalization weighted index has generated annualized returns of 10% versus 9% for the equal weighted index. Technology stocks have led the way in annualized returns bringing their market capitalizations to 29% of the market weighted index.
Following the long period of low interest rates prior to and during the pandemic, the Federal Reserve boosted interest rates aggressively with the onset of inflationary pressures. During times of rising interest rates, bond values decline to generate yields in line with new issues of fixed income securities. While many bond issues are now trading over their issue price, those bonds will mature at par which is the original issue price or be redeemed by the company at par.
If bond yields continue to move lower in 2024, bond prices should increase. Nominal bond yields are currently at levels above the inflation rate which provides real income for risk averse investors. Bonds play a role as diversifiers and sources of income.
Volatility can conceal market trends. As we look ahead in an economic environment of modest growth and relatively low unemployment, it is reasonable to expect that current interest rates may continue to temper investor expectations for equity returns. However, recent indications that interest rate increases have been suspended has stimulated higher equity prices. The stock market is considered a lead indicator. Recent market strength would imply a reasonable expectation for economic growth in the year ahead.
Penobscot’s long-established investment objective of long-term capital appreciation and income growth is focused upon high quality companies with proven records of consistent earnings and dividend growth. Qualified dividends are a source of income for shareholders at tax preferred rates. Dividend growth is a metric that confirms the results of successful business planning and execution. If this sounds familiar, it is because dividend growth is an unwavering principle of our investment philosophy.
We always welcome your questions and updates. From all of us at Penobscot, we wish you all the best in the year ahead.
