3 Things To Do After The S&P 500 Gained Nearly 25% In 2023 (NYSEARCA:SPY)

The S&P 500’s (SPY) nearly daily march higher since Oct. 30, 2023, frustrated perpetual bears. Investors who bought puts to either bet against the market or hedge its rise are at a disadvantage. Those who earned as much as 5.6% in risk-free money market funds are similarly unhappy. Yields on Schwabb’s Value Advantage Money Fund (SNAXX) fell to 5.27%, decreasing its attractiveness.

Markets latched onto The Federal Reserve’s rate policy inaction. When the central bank planned another 25 basis point interest rate hike in the summer, interest-sensitive assets fell sharply. In the two previous Fed meetings, the Fed’s rate pause unleashed what looks like a market melt-up. The index added 4.87% in the last month alone and is up 24.75% year-to-date.

What are three things that investors should do after the S&P 500 defied bears expecting a “massive” crash? Index investors also should note that Nasdaq (QQQ) returned 54.77% year-to-date, matching a performance not seen since 2003.

1. Look at the Top Performers

Among the individual holdings, readers should differentiate trades from investments. Trades are speculations that are generally held for the short term. Stock pickers might want to lock in profits on stocks that returned 100% or more. The trade is not yet a profit until sold.

In the magnificent seven section, the large market capitalization of security alone does not justify its immunity to a sell-off. Though valuations are unfavorable, fundamentals for Nvidia (NVDA) are rising. On its conference call, Nvidia said that companies like Meta Platforms (META) are in full production with deep learning, recommender systems, and generative AI. Cloud service providers accounted for nearly the other half of Nvidia’s Data Center revenue. Looking ahead, its H100 Tensor Core GPU instances enjoy high demand amid its general availability.

In the table below compiled from Stock Rover, NVDA stock more than doubled this year. META stock is close to a double return.

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Above: contribution to the index discussed below.

Export control regulations imposed by the U.S. government on sales to China are Nvidia’s only headwind. Even after warning that “sales to these destinations will decline significantly in the fourth quarter,” the stock bounced back from $450 to around $495.00.

NVDA stock scores well on all factors except for valuation:

In the tourism sector, Royal Caribbean (RCL) and Carnival (CCL) are the best post-pandemic trades for 2023. Hilton (HLT) gets an honorable mention, especially when it scores well on growth and profitability.

Investors are ignoring the high levels of debt on Royal Caribbean and Carnival’s balance sheet. The former said that it used its cash flow from operations to cut its debt by $775 million. Royal Caribbean expects to pay off more than $3.5 billion in debt, cutting its leverage to the mid four times by the end of the year.

Circling back to the top tech performers, readers would not find Arista (ANET), Salesforce (CRM), Broadcom (AVGO), and AMD on the list as a surprise. Conversely, Intel’s 95.3% return is unusual. Despite HP Inc. (HPQ) and Dell (DELL) warning of weak PC sales, Intel still rewarded value investors. The firm refreshed its PC CPUs to the 14th generation Meteor Lake line-up. The chips consume more power and run at higher temperatures. In addition, they cost more than the processors offered in the last two generations.

Intel benefits from Israel granting $3.2 billion for the new $25 billion chip facility. Shareholders are betting that Intel’s artificial intelligence on Dec. 15, 2023, will compete effectively against AMD and Nvidia.

2. Look at the Worst Performers

During the tax-loss season in the last several weeks, investors may have sold solar energy firms like Enphase Energy (ENPH) and SolarEdge (SEDG). After recognizing the fading tailwind from COVID vaccines, Moderna (MRNA) and Pfizer (PFE) lost 43.9% and 41%, respectively.

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Stocks that lost the most this year have a better-than-average chance of rebounding at the start of 2024. Value hunters should check the value factor grade first. Without fundamental catalysts, however, the rebound may prove short lived.

Here are the ratings on a selection of the worst-performing S&P 500 stocks:

Pfizer, Moderna, and Dollar General (DG) have varyingly strong quant factor grades, as shown above. Albemarle scores well on profitability and growth. However, Albemarle (ALB) stock has a “Sell” rating. Investors need to watch EV demand and pricing closely. In addition, analysts forecast a brutal 30% drop in Lithium carbon prices in China.

3. Allocation Mattered

The S&P 500’s return this year is a reminder that allocation mattered. Technology companies accounted for nearly two thirds of the index’s gains. Investors who did not buy tech stocks after they fell in 2022 likely underperformed the market this year.

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Looking ahead, if sentiment reverses for tech, investors may want to rotate out of the sector. Still, if companies keep investing heavily in AI solutions, the winners above will keep running higher.

Your Takeaway

Investors who expected the bear market of 2022 to continue in 2023 missed out on the rebound. The fear of missing out (or FOMO) will run stronger as markets enter 2024. FOMO is one of the highest risks that investors face today. Hopes led to expectations of a rate cut. This is a primary driver of the positive sentiment.

Markets are prone to mood change. This typically happens without warning. Investors cannot time markets but they can take some money off the table. While money markets still pay over 5%, the yield is falling as Treasury bond prices fall. In 2023, investors piled into cash worth $1.3 trillion this year. For 2024, they will need to decide how much to allocate into stocks and how much to lock in before interest rates start to fall.