Whether we want to believe it or not, investment markets are optimistic. During times of volatility and swings in the market prices it’s hard to remember. But markets generally go up. Dating back to the very beginning market prices have gone up. It hasn’t been a flat line of course – there have been recessions and corrections and crashes – but here we are near all-time highs. We can’t get there without going up.
Benchmarking
Benchmarking is defined as evaluating or checking something by comparison with a standard. When we think about investments, the benchmark is usually (right or wrong) the S&P 500 index. The trick to benchmarking is picking the right one. Investors with a lower risk tolerance with investments mostly in bonds and cash would likely be confused comparing the performance of their portfolios to the performance of the S&P 500. The same way an investor solely holding international stocks wouldn’t be wise to benchmark against the S&P 500. With the right comparison selected, we can better manage our expectations. I was catching up with a friend recently and he brought this up with interest rates. The idea is that, since interest rates were at or near 0% since mid-2009, 0% is the benchmark many are using now. Thinking that rates will eventually be cut from the current 5.25% down to 0% again. Bringing with it the idea that mortgages could move back down to the 3%’s and car loans to the same territory. But 0% may be the wrong benchmark. The average Fed Funds rate since 1955 is 4.61%, while the Fed has stated their long-run projection is 2.80%. Perhaps expectations for mortgage rates and bond price growth need to be tempered when a more realistic benchmark is used.
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The below chart is a look at the percent of unprofitable companies in the Russell 2000, looking back from 1998 through the second quarter of 2023. This particular chart was in JPMorgan’s Guide to the Markets. On its own, it generates a number of questions. The primary question I asked myself is, Has the upward trend in unprofitable companies in the Russell 2000 impacted the return over the same time period?
When this was posted by JPMorgan and when I reviewed it, the markets had yet to pop from the positive news from Jerome Powell and the Fed of interest rates holding firm. Granted, the door is still open for more hikes, but the language and odd for now suggest a pause. Since that news, small cap stocks are up over 6%. But again, based on the timing of the post post Q3 and with how Q4 was starting, it seemed the implication of unprofitable companies was to suggest a possible reason for small cap underperformance in 2023. Perhaps the increase in unprofitable companies has led to an uptick in volatility and downside pressure during any time of uncertainty. That was my first thought, so perhaps I’m biased when thinking others made the same connection.
When looking at the historical returns of the Russell 2000 index (below), it seems far from the truth. In the same time period, (1998 to now) the Russell 2000 index has return a cumulative 309%. Annually, that math’s to roughly 12.25% each year. To be fair, that’s to be expected with the stock market - over time, stock prices appreciate and the riskier ones tend to appreciate a little more.
One thought to wrap this up - perhaps as the unprofitability trends up and the risk associate with small caps (one would assume) follows, the expected annual return may follow.
The chart above is a look at the US Aggregate bond index as of September with forward charting estimates based on potential rate changes. Based on current duration and yield:
It’s no secret that Bitcoin and cryptocurrencies, in general, have gained significant popularity and notoriety over the last 12 months. Most notably because the return has been an astronomical 430% over the time period, but also due to companies such as Tesla, MicroStrategy, and Square investing a collective $3.9 billion earlier this year. For anyone invested in Bitcoin or following the asset, this last year has not been without its ups and downs.
Bitcoin is a decentralized digital currency. All transactions made with bitcoin are noted on a public ledger and verified by a network of computers. Many people and companies are working to verify transactions instead of just one entity, making it decentralized. The public ledger of bitcoin transactions is stored in the blockchain.
