Written by Edwin “Tucker” Hamlin, CFP® and Tom Dunlap, CFA®
With Memorial Day upon us, the unofficial start to summer is finally here. For many of us in New England, turning the calendar to June is a welcome relief with better weather, the ending of the school year and a vacation to the Cape or Islands. From unrest in the Middle East to stubborn inflation data, 2024 has had no shortage of headlines with the U.S. presidential election now firmly in the limelight. Despite all of this noise, we approach the summer months with stocks at or near all-time highs.
As the closing bell rang on Tuesday, May 21st, the S&P 500 posted its 24th record close of 2024. Year to date, the S&P 500 is up over 12% and more than 31% since Q1 2023 when banking sector fears were widespread. Since 1950, the S&P 500 has set over 1,250 all-time highs with an average of over 16 records every year, according to RBC Global Asset Management. Perhaps counterintuitive, investing at all-time market highs can actually result in better than average long-term returns. As shown in the chart below, 3-year cumulative returns have been almost 8% better for an investment made at an all-time market high versus deploying on any day.
Perhaps what is most important here is the perils of market timing. Ultimately, staying fully invested as part of a disciplined approach will produce the strongest long-term returns, and based on historical data, can be expected to outpace a market timing approach that can miss out on the best days that account for a high percentage of overall market returns. While many clients want to try and time the market the best they can, fiduciaries, we continuously remind clients that 91% of a diversified portfolio’s long-term results are explained by asset allocation (i.e., the mix of stocks, bonds, and alternatives+).
We strive to understand every client’s risk tolerance and return objectives to determine the appropriate asset allocation when building client portfolios. In the construction of those portfolios, our goal is to minimize volatility during periods of market stress. We believe our long-term approach to asset allocation and portfolio construction is well-suited to navigate an economic environment that is increasingly hard to predict and makes for low odds of being able to time the market. Remember, entering 2023 the consensus call was for a recession, but instead the S&P 500 posted a 26% return for the calendar year. Similarly, at the start of 2024, many forecasted seven rate cuts by the Federal Reserve, and yet as we approach June, there have been no rate cuts, and now only a couple are predicted for the remainder of the year. Sifting through the noise, we believe it is a great time to build balanced portfolios of high-quality stocks, intermediate investment grade bonds, and best-in-class alternatives such as private credit. The risk-reward is appealing relative to cash and either overly defensive or high beta (i.e., volatile) portfolios.
Figure 1: Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. (Left) *Market floor is defined as an all-time high from which the market never fell more than 5%. (Right) **"Invest on any day" represents average of forward returns for the entire time period whereas "Invest at a new high" represents average of rolling forward returns calculated from each new S&P 500 high for the subsequent 3-months, 6-months, 1-year, 2-year and 3-year intervals, with data starting 1/1/1988 through 12/31/2023. Data is as of March 31, 2024.
Figure 2: Ned Davis Research, Morningstar, and Hartford Funds
+ Source: Vanguard, Morningstar 2020 report
DISCLOSURES
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Clarendon Private’s strategies are disclosed in the publicly available Form ADV Part 2A.
Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
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