INSIGHTS
By
Kris Wild,
Chief Investment Officer
Dec 5, 2023
As tech giants dominate and smaller stocks struggle, financial markets reveal a deepening dislocation fueled by fiscal surprises, systemic risks, and policy distortions—what does this mean for 2024 and beyond?
Persistent Dislocation in Financial Markets
Dislocation remains a frustrating theme for financial markets. The benchmark S&P 500 has rallied nearly 20% year-to-date, driven largely by a handful of technology behemoths, while the average and median stocks within the index lag significantly. The outsized performance of this technology sector is exemplified by the Nasdaq 100 Index, which is up nearly 45% year-to-date.
Hopes for Broader Market Recovery Fall Short
This year’s economic resilience raised hopes that the recovery would extend beyond dominant tech leaders to smaller-cap names like those in the Russell 2000 and more economically sensitive sectors like the Dow Jones Industrials. However, these broader measures have only gained about 5% and 9%, respectively, on the year, leaving the gap between tech and the rest of the market starkly visible.
Performance Disparity Amid Year-End Rally
Despite a year-end rally fueled by expectations of lower interest rates and a soft landing, the disparity remains. There is a tremendous dislocation between the over-owned technology giants and the forgotten stocks of nearly every other index outside of the Nasdaq 100. A soft landing should theoretically benefit all sectors, but the market continues to favor a few large-cap tech shares.
Tech Dominance: Rational or Unsustainable?
While the concentration in tech isn’t irrational, historical precedents suggest such narrow leadership tends to end with significant asset repricing. A rotation from tech winners to lagging sectors could present an extraordinary opportunity, but the absence of this rotation suggests skepticism about the consensus narrative of economic resilience and a soft landing.
Systemic Risks and Safety Trades Into 2024
The failure of the dislocation to resolve points to heightened systemic risk. Earlier predictions of a 2023 recession due to interest rate hikes were derailed by unexpected fiscal stimulus and liquidity injections from the U.S. Treasury and Federal Reserve. While this averted recession, the benefits were uneven, favoring selective markets.
Fiscal Concerns and Narrow Market Participation
Treasury markets have improved, but term premiums reflect ongoing fiscal concerns. Equity markets remain narrow, with fiscal largesse failing to spread broadly across the economy. Smaller stocks and many industries remain out of favor, highlighting skepticism about the sustainability of fiscal-driven growth.
The Role of Short-Term Funding and Crowding Out
The government’s fiscal borrowing in 2023 relied heavily on excess funds in money markets, which have declined from $2.5 trillion to around $800 billion. If these funds are depleted, the Treasury may need to turn to longer-duration money pools or private sector reserves, raising concerns about "crowding out" private investments and exacerbating market dislocations.
Maintaining Financial Plumbing at All Costs
Despite these risks, monetary authorities are likely to step in to maintain financial stability. Quantitative Easing (QE) remains a key tool, indirectly supporting fiscal debt servicing and ensuring private debts find refinancing liquidity.
Policy Distortions and Market Realities
While QE tends to boost financial assets, the resulting monetary inflation reduces real returns and keeps gains confined to asset markets. This inability to translate into broader economic benefits reinforces the dislocation between big tech and the rest of the market, underscoring the distortions created by policy interventions.
Disclosure:
© 2025 Morningstar, Inc. All rights reserved. The Morningstar Rating™ is for the Class A only; other classes may have different performance characteristics. The rating is not a recommendation to buy, sell, or hold the fund. Morningstar does not guarantee its accuracy or completeness and is not responsible for damages or losses arising from any use of this information.
Investors should consider the Fund’s investment objectives, risks, charges, and expenses before investing. The prospectus, containing this and other information about the Fund, should be read carefully before investing. The prospectus is available at the download icon below or by calling 800-711-9164. Current and future holdings are subject to change and risk.
Investments in the Fund are subject to investment risks, including the possible loss of some or all of the principal amount invested. There is no assurance that the Fund will be successful in meeting its investment objective. The Fund is subject to the following additional risks:
▪ Active Trading Risk: Active trading may result in added expenses, a lower return, and increased tax liability. Since the Fund’s advisor engages in high turnover trading strategies, the Fund will have high portfolio turnover rates.
▪ Closed-End Fund Risk: Closed-end funds (CEFs) are subject to investment advisory and other expenses, which will be indirectly paid by the Fund resulting in duplicative fees and expenses. CEFs are also subject to management risk because the advisor to the underlying CEF may be unsuccessful in meeting the fund’s investment objective.
▪ Equity Securities Risk: Equity securities are subject to changes in value, and their values may be more volatile than those of other asset classes. These changes in value may result from factors affecting individual issuers, industries, or the stock market.
More information about these risks can be found in the Fund's prospectus.
Vigilant Distributors, LLC., Member FINRA/SIPC. There is no affiliation between Modern Capital Management Co., including its principals, and Vigilant Distributors, LLC.
- No Bank Guarantee
- May Lose Value
- NOT FDIC-INSURED