As we enter the final stretch, it’s clear that 2023 has been a truly unique year in the market, characterized by its remarkably narrow breadth. With the Fed’s rate-hiking cycle likely finished, everyone now hopes for Santa to bring a soft landing for the economy and a broadening of
the tape for the stock market. Broad and narrow refer to how many stocks are participating in the rally. As we’ve discussed frequently throughout the year, a handful of mega-cap companies have driven the market’s performance in 2023.
This year, stocks such as Apple, Google, and Microsoft, all companies we own, and four other mega-cap tech companies, are up 80% and comprise nearly 30% of the entire S&P 500 index. Meanwhile, the other 493 companies in the S&P 500 index are flat. This phenomenon is reminiscent of past market trends like the blue-chip-dominated early 1970s or the high-flying tech stock frenzy of the late 1990s that culminated in the dot-com bubble. History also reminds us that when market leadership becomes this concentrated, things can change quickly, making it crucial to be prepared for the unexpected.
In the early ’70s and late ’90s, the market participation broadened once the high fliers succumbed to gravity. History has shown that when leadership gets so lopsided (as it was then and is now), the tide can turn under any circumstances, bullish or bearish. Over time, returns tend to level out. Interestingly, the S&P 500 closed at the same level on November 30, 2023 (4567) as it did two years prior on the same date! This demonstrates again why taking a long-term perspective when investing is essential and not getting too worried about short-term fluctuations.
We all know about the clarity of hindsight; it’s the future that’s murky. It’s easy to look back and pick a handful of high-performing stocks from any period and boast about how easily they outpaced the market. However, this does not mean we should blindly chase the hottest performers at the moment. As investors, we must remember that price matters, even for the best companies. As preached consistently, finding stocks with competitive advantages at reasonable prices is the key to achieving long-term success. In other words, resist the urge to chase fleeting returns and focus on acquiring undervalued companies with solid fundamentals.
Patience often reaps the rewards of investing, and our initial investment in Eli Lilly in 2006 exemplifies this. At the time, the stock price presented an attractive opportunity due to ongoing concerns about patent disputes and looming patent expiration on a major product. However, we recognized the company’s strong revenue growth, profitability, robust drug development pipeline, and strong drug discovery/development capability making it an excellent long-term investment. Our patience has been handsomely rewarded, as Eli Lilly has emerged as one of the best-performing stocks in recent years. This is driven in part by the remarkable success of Mounjaro™, its innovative drug for type 2 diabetes and chronic weight management.
As we look ahead to 2024, we are hopeful for a broader market rally and a soft landing for the economy. However, we remain mindful that the unexpected can occur. For over 30 years, we’ve been laser-focused on one goal: helping our clients achieve higher returns with lower risk. We are deeply grateful for your ongoing trust and look forward to working with you in the new year.