Despite initial fears of market turmoil at the beginning of the year, the S&P 500 surprised everyone with a remarkable 24% gain in 2023. Do you feel like you missed out?
I frequently mention ‘buy companies, not markets’ and this was a theme last year and to be honest, it really is the path to long-term wealth creation in any year. Rarely do macro factors affect good companies.
Several important things led to a good shift in the stock market in 2023. As inflation went down, the Federal Reserve slowed down the rate at which it raised interest rates. This made investors feel better and raised the value of stocks. Even though rising interest rates were hard on the U.S. economy, it showed a lot of strength by avoiding a recession and building a strong base for business earnings growth. This toughness was especially clear in industries like technology and energy, where many companies beat earnings estimates, which made investors even more confident. As the year went on, people became more hopeful that the rate-hike trend might be coming to an end and that interest rates would go down in the future. This led to a late-year surge in the market. Things that happened in 2023 showed how complicated economic conditions are and how unexpected events can have good effects on the stock market, despite initial fears and predictions.
Technology-Driven S&P Index
When it came to driving the stock market last year, the technology sector, and especially the leadership of the 'Magnificent Seven' (the largest tech companies), was crucial. These tech giants, known for their sizable market capitalization and significant influence, outperformed the index with strong performance. Their ongoing innovation, forays into new areas, and adjustments to the ever-changing digital landscape are the reasons behind their success. They were already in a strong position before the epidemic accelerated the broad use of digital services and remote labor. Increased demand across a variety of sectors was good for businesses within this group, which offered a wide range of technology, from cloud computing to artificial intelligence. Their capability to grow steadily, weather macro-turbulence, and take advantage of new technology trends like sustainable technology, 5G, and the Internet of Things all contributed to their allure to investors. Last year, their leadership played a significant role in shaping the technology sector's direction and the overall market, solidifying their position as influential figures in the global economy. The "Magnificent Seven" (Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta Platforms, and Tesla) played a major role in the S&P 500's rise in 2023, contributing roughly 60% of the index's gains. (AAPL) (MSFT) (AMZN) (GOOG) (NVDA) (META) (TSLA)
There is no denying the fact that a lot of emotion was tied up at the start of last year with the idea that Armageddon was on the horizon and the best thing was to get out as quick as you could. However, if you took off those lenses, names were on sale. Something I am hesitant to say I highlighted at the time and took a lot of abuse for. Remember, bad news sells, and it also gets strongly into your head, ensuring you won’t make the best possible investing decisions.
2024 Macro Outlook
So, let’s reset. 2024 can have many macro hurdles to worry about yet again. the stock market might have a rough go of it. Who were the primary offenders? A worldwide recession, ongoing supply chain problems, the Federal Reserve's ever-shifting interest rate policies, and quantitative tightening are all factors to consider. On a geopolitical level, there has been little respite, what with US election-related worries and potential disruptions to energy and trade flows caused by crises in Ukraine and elsewhere. Keep in mind that certain industries could be thrown into chaos because of regulatory reforms and antitrust crackdowns. Naturally, there is always the possibility that anything out of the ordinary, such as a natural catastrophe or a "black swan" crisis, may derail plans. Remember that diversified portfolios, staying informed, and skillful navigation can still lead to smooth sailing, even in turbulent waters.
Cheap Value Stocks Can Stay Cheap
Rather than get caught up in a load of macro nonsense again, why don’t you take a good look at individual companies on their merit? Maybe you say you are doing this already? Let’s put another layer on top of that and look at companies that are going through some sort of corporate change. Remember, just buying cheap stocks may not cut it. Cheap companies can stay cheap without a catalyst. Because of how the market perceives them and their unrealized potential. Value stocks can stay low. Companies in less glamorous industries or those that are temporarily struggling are generally linked with these stocks. When the market prioritizes industries with rapid expansion, it can cause good companies with solid foundations but moderate growth prospects to be undervalued for a long period of time. The stock price of a firm might not reflect its true worth if investors fail to recognize or fail to adequately assess its hidden assets, turnaround possibilities, or recovery prospects. This situation can continue until something happens to modify the market valuation, including when the company's operations significantly improve or when its undervalued status is recognized. Catalyst events are non-correlated to the market and provide a bridge to move the price to value if analyzed correctly, potentially turbocharging your returns.
Adjusting Your Focus
Because these corporate changes can release value and drive growth, investing in companies going through organizational transformations is typically a great idea. Corporate change events that have an impact on businesses include mergers and acquisitions to remain competitive, spinoffs and divestitures to concentrate on operations, and restructuring to reduce costs or alter strategy. Usually, when management changes, new tactics or changes in the way things are done follow. Bankruptcy and reorganization can change operations and debt, and when rules or regulations change, businesses must change how they do things. It's important for investors to look at these events because they bring both risks and possibilities. Here are 5 reasons why corporate change events are much better than standard buy-and-hold strategies.
- Enhanced Competitive Advantage, more efficient operations, or access to previously untapped markets are all possible outcomes of such shifts. For example, spinoffs typically produce more targeted and nimble company units, while mergers and acquisitions can open doors to new markets and give economies of scale. Nevertheless, before putting money into these businesses, you should do your research to learn about the change's reasons, possible advantages, and hazards.
- Discovering Untapped Potential through mergers, acquisitions, spinoffs, and divestitures, one can come across chances to acquire assets that are currently undervalued compared to their actual worth. Investors can profit from price misalignments and future performance shifts by studying companies on the verge of substantial transformations.
- When a corporation takes the initiative to solve problems, expand into new areas, or streamline its processes, it is usually a Catalyst for Growth. Finding businesses that are about to undergo a strategy shift and capitalizing on their increased growth potential and profitability may be a very profitable venture.
- Changes in Corporate Policy frequently seek to improve efficiency and innovation by cutting costs, simplifying processes, and increasing the rate of new product development. Financial performance and investor confidence can both improve for organizations going through these kinds of transitions.
- The Power of Activist Investors can influence changes in business strategy, asset allocation, or governance, which could lead to the discovery of hidden value or a realignment of priorities. Identifying them is one way to get a head start on finding businesses that powerful activists have targeted.
- Market Volatility Opportunities: Change events can cause short-term market volatility, giving opportunity investors a chance to jump in. In uncertain markets, it is possible to make calculated purchases and sales by studying the causes and effects of individual shifts.
Where To Look?
There are limited services out there aimed at finding catalyst-driven situations. One worth looking at is The Edge.
On the date of publication, Jim Osman did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
