Looking At: My Investing Wish List

Estimated reading time: 7 minutes

What to Wish For

It’s been a dramatic start to the year in markets, although you wouldn’t know it looking at the returns of broad indices. The S&P is roughly flat year-to-date, yet the spread between the best and worst performing industry groups is a whopping 45 percentage points. 

What will it actually take to spark a durable market bounce? We’ve put together a wish list to watch for. First let’s look at what’s top of mind for investors.

The group making the most noise right now is Software, which is down 21% YTD. Some stocks are even down more than 40%. In contrast, the Semiconductors group has returned 9% YTD, with some constituents up more than 40%. That has resulted in the widest performance spread between Semiconductors and Software ever. 

There are some unique contributors to this situation: Investors interpreted recent Anthropic updates on its Claude Code and Cowork offerings as a major threat to SaaS (Software as a Service) companies, and a note from Citrini Research went viral when it outlined a very bearish potential scenario in which AI brings on mass white-collar unemployment.

The ratio between Semiconductors and Software is one we watch closely as a cyclicality signal. Traditionally when Semis outperform Software it’s a positive sign for the economy – and that’s the message it’s sending right now. However, other market signals suggest something different, which muddies the water (more on that later).

It isn’t just Software that’s been softening; The percentage of Technology stocks trading above their 200-day moving average has dropped from 65% to 44% since January. Additionally, the ratio of valuations on the Technology sector versus the S&P 500 is at post-Covid lows.

This breakdown in leadership has investors feeling a little jumpy given that Tech is what’s largely driven market returns for the past three years. 

Market Wishes

You could look at some of these metrics and say the charts look like a good time to buy. But that would assume you aren’t clouded by emotion or the downward movement you may have already felt in your portfolio. 

On a positive note, the past couple trading days have been strong, and it would be great to see that trend continue. More specifically, here are a few important indicators of improvement we’re watching for (that would calm some fears.) 

From a market perspective, sector and industry group performance can tell a meaningful story. In a bounce after a recent market rout, we’re likely to see some element of buy-the-dip, which tends to come in the form of positive returns in the hardest hit stocks. What we’d like to see more of, however, is strong results from cyclically sensitive groups such as Banks, Consumer Discretionary, and high beta stocks more broadly. 

Since mid-January, these cyclical groups have weakened on a relative basis (see chart below), sending a message that there’s economic uncertainty and lower risk appetite. If these start to perk back up, it’s a strong and durable sign for markets.

Economy Wishes

While there are several aspects of the economy we’d like to see stay strong or improve, we’re going to focus on just one in the interest of simplicity. We’re focusing on consumer confidence because many elements of the economy either affect it or are affected by it. 

Consumer confidence arguably matters more than most metrics we can look at. Without it, consumer spending suffers, and since that accounts for over two-thirds of GDP growth, the broader economy and consumer-facing company revenues likely suffer too. 

Cyclical signals in markets can also suffer if consumers feel less optimistic about the future. Needless to say, this matters… a lot. 

We’ve all heard about the K-shaped economy: High earners who aren’t suffering as much from inflation account for a disproportionately big share of total spending, while lower earners who are being squeezed account for a smaller portion. 

This dynamic is showing up in consumer confidence more dramatically, with the lower third of income earners responding much more negatively in the most recent sentiment survey than the top two-thirds. 

In fact, there’s been a wider than usual spread between the lower and higher income earners for most of the past two years. Since the top represents such a large portion of spending, this hasn’t shown up in the headline retail or growth numbers. As the economic cycle matures, however, the bad vibes may start to spread into higher income brackets as well.

High on my wish list is a narrowing of this spread, and a pickup in all three of these groups. That said, consumer confidence is something that can swing wildly month-to-month, so it’s more important to look at the trend over a three- or six-month period before drawing any major conclusions. This may require patience, but incremental improvement over the coming months would be a very positive sign. 

Be Specific About What You Wish For

Of course, we all want a strong economy, roaring stock markets, and consumer spending that sees no stopping. As we navigate year four of an AI-driven investing cycle, We’re willing to settle for a solid economy, a durable stock market, and consumer confidence that’s improving broadly. If those elements materialize, much of our other worries will become less threatening. 

There have certainly been some injuries in markets this year, but they don’t have to be season-ending. We’re in a time of rapidly evolving expectations that make investing more emotionally taxing, but if we keep our eyes on what’s important and keep our wish lists short, the sport of investing feels easier to train for. 

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