Where is the Recession Everyone Keeps Talking About? Investing After a Recession. (Part Two)

So, the recession happened, now what? As I said in Part One of this series, (if you haven’t read that I suggest you read it first) I believe that the worst is over from the Covid Recession. When looking forward there are still some areas of concern, but overall, I think we are out of the woods. There are curtain world events that could lead to more issues, but currently, we should be setting up for another bull market run. So how do we invest to best capitalize on this new bull market? (Remember, all opinions in this blog are my own, and do not reflect Cetera Advisors LLC, or SDSmith Financial.)

I believe in index investing, while trying to capitalize on what the market and economic conditions are giving us. There are three prime investment areas that we hope to see take off over the next 3-5 years.

1. Artificial Intelligence: AI is going to change the way our lives are lived whether we like it or not, the question is how big will the AI boom be to the US stock market? When we look back at recent technological booms, we have seen a clear market emerge from new technology. The internet has changed, not just how we live, but how we are going to evolve going forward, and it has been the driving force behind multiple economic and stock market booms in the past. First, the personal computer boom, then the dot com bubble, which I believe does not get represented properly. If you invested $10,000 in the S&P 500 in 1995, even after the bubble popped with consecutive negative years from 2000-2002, you would have seen a 119% gain over that time. Next, we saw the Social Media boom, which saw companies like Meta among others bring the world closer together. The most recent one we saw was the Streaming boom, which saw companies like Netflix, Roku, and Fubo take off. The question becomes, is AI the next internet? Or is it another piece, like streaming and social media? Either way, you won’t want to miss the ride it goes on over the next five years.
2. Small Cap Stock: The S&P 500 is still going to be the largest index in my portfolios; however, small caps are looking to make a big comeback in 2024 in my opinion. My reasoning behind this has to do with current price to earnings ratios. Price to earnings ratio is a measure to see if a stock is overvalued, undervalued, or properly valued, it is calculated by the price of how much a company is worth, divided by how much they are earning in profits. If we look at the major indexes, the S&P 500 (Large and mega cap companies) has a much higher P/E ratio than the Russell 2000 (small cap companies). According to Morningstar, small caps hit their lowest P/E ratio since 2009, and from March of 2009 to March of 2010, the Russell was up over 60%. However, I said in my previous article that I do not want to invest in small and mid-cap banks. So how do lower the financials portion of this portfolio? We go for small and mid-cap growth companies, considering most of the financial companies of that size are value companies.
3. Equal Weight S&P 500: We have seen companies really expand to new heights over the past five years or so, with five companies having a market cap over one trillion dollars. We like using the S&P 500 as a benchmark for portfolio performance due to its size of companies giving it some diversification, and its companies are all well known. However, it isn’t as diversified as you might think, with almost 24% of the holding between the top five companies of Apple, Microsoft, Google, Amazon and Nvidia. If we also use point one in this article to invest in tech and AI, we will only be adding to our holdings of these companies. This can result in being overweight and putting yourself at what is called concentration risk. An equal weight S&P 500 holding has all 500 companies at .2% of their portfolio, with rebalancing being dependent on the fund itself.

These ideas are not for everyone, and your risk tolerance may vary. If you are interested in finding out what your risk tolerance is, you can access our questionnaire here. If you want to know more about the specific funds that I am using to execute this strategy, you can set up a phone call here! Thanks for reading.