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December 5, 2023
Institutional BlogNews
Investing in the “Magnificent Seven”
Now the leading high-tech companies are the “Magnificent Seven” (those of a certain age will relate). These companies – Apple, Alphabet (Google), Amazon, Meta (Facebook), Microsoft, Nvidia, and Tesla – make up about 30% of the S&P 500 index. While it is a stretch to expect an investor is lucky enough to have built and maintained an equally weighted portfolio of these stocks over the past ten years, had they done so it would have earned a compound annual return of 40% – an extraordinary result indeed. Unfortunately, investing is not done with hindsight. We can’t expect a repeat performance of the last ten years for the “Magnificent Seven.”
Realized returns depend on how an uncertain future unfolds versus what’s expected. The extraordinary past results of the “Magnificent Seven” can be explained by changing expectations for the impact of AI (Artificial Intelligence). Unfortunately, the future of AI, while no doubt profound, is probably no clearer today.
Market prices reflect the best predictions based on what is known. Any predictions that are different should be taken with a “grain of salt.” While we are faced with significant uncertainty about the future of AI, at any point in time market prices reflect this unknown future. Of course, there will be surprises — diversification lessens their impact.
Yet, it is important to participate in the risks and rewards of AI. Since the S&P 500 includes a significant commitment to the “Magnificent Seven,” holding an allocation to stocks of this index in a well-diversified portfolio meets this objective. Avoid trying to guess the future of AI by maintaining established commitments and enduring the impact of the surprises
Market Review
Stocks
Stocks snapped back nicely this month on the positive inflation news, leading to expectations that the Fed will relent on increasing interest rates. Stock market indices are all up over 8%. The November numbers are evidence of how quickly markets can turn around. I don’t recall many predictions of a turnaround at the beginning of the month.
Year-to-date returns, while variable among various markets, are all in positive territory. The 20.8% return of the S&P 500, which is dominated by the largest tech companies, is well above other stock market indices that ranged from 4% (Russell 2000) to 12% (EAFE). The jury is still out on whether these recent results are evidence of the so-called “soft landing” from the Fed’s efforts to tame inflation – but it feels better.
Bonds
Bond yields dropped in the past month, also reflecting the positive inflation news and Fed expectations. While yields on short-term bonds stayed about where they were, longer-term yields dropped significantly producing positive returns on longer-term bonds. The yield on the bellwether 10-year Treasury fell significantly from 5.0% to 4.3%, a -0.7% drop for the month.
As the Fed embarked on its program to tame inflation, the 10-year yield has jumped a remarkable 300 basis points (3%), alarming many observers. However, it is important to note that this increase is off an unsustainable low. Yields at today’s levels are more reasonable.
If you’re ready to start planning for a brighter financial future, Rockbridge is ready with the advice you need to achieve your goals.