Stocks have enjoyed a solid start to the year, with U.S. large-cap stocks leading the way. The S&P 500 is up over 15% year-to-date, but, as we noted last month, this rally has been almost entirely driven by a handful of technology titans. The top ten companies in the index account for over 95% of its year-to-date performance. This concentrated outperformance is primarily due to the excitement around artificial intelligence (AI). Market breadth is exceptionally narrow, with most gains concentrated in the tech sector.
Short-term market moves are important to be aware of, but equally if not more important for investors is to grasp longer-term returns. As extreme as this year’s better-than-average performance has been, if you look at the last two years, you find that the annualized rate of return of the S&P 500 is 3.4%, seven percentage points lower than the long-run average of 10.9%. As easy as it is to say that the market has gotten ahead of itself, it is just as easy to look over a different time period and say that it has fallen behind. It depends on your timeframe.
We continue to recommend that investors remain diversified and maintain a long-term perspective. For years, international stocks in developed markets have lagged behind their U.S. peers and indices’ averages. However, this year, the Europe, Australasia, and Far East Index (EAFE) is up double digits, similar to the S&P 500. This is despite the overhang of global inflation, war, and supply constraints, proving once again that it is not easy to predict the performance of any one market in a single year. However, remaining diversified and adopting a long-term perspective can help you stay positioned for long-term returns.
While everyone is focused on all things AI, we continue to scour markets for underpriced equities with long-term potential. We found just such an opportunity with Sealed Air. This leading provider of packaging products and services is designed to help protect products, keep food fresh, and improve efficiencies. Perhaps best known for its commercial protective packaging, “bubble wrap,” the company has multiple business segments, including protective, food, and healthcare packaging. They also offer services that help customers improve their packaging through design, engineering, and testing. Sealed Air’s products and services are used in various industries and have a global presence with operations in over 100 countries.
While not as flashy as the latest AI-focused tech titan, this company provides essential consumer packaging. It represents the type of company we like to uncover when everyone else is distracted by the latest investment craze. We added Sealed Air to our small-cap portfolio in June and believe it is an excellent investment for the long term.
Looking ahead, investors should continue to be diversified, as the stock market’s narrow breadth should broaden to include other companies overlooked amid the AI hype. Further rate hikes from the Fed could be possible, which could weigh on markets in the quarters ahead and create volatility. While we may not know with certainty what lies ahead, we can say from experience that patience and discipline reward investors with a long-term perspective.
We will continue to monitor the markets closely and adjust our portfolios as needed. We appreciate your continued trust and support.