The most popular market narrative so far this year is probably the story of the so-called “Magnificent 7”. Preceded by groups such as the FAANG stocks, the Magnificent 7 is made up of Apple, Alphabet (Google), Meta (Facebook), Microsoft, NVIDIA, Amazon, and Tesla. These 7 stocks account for a significant portion of the growth of the S&P 500 so far this year.
The Magnificent 7, as many may recall, was a movie originally released in 1960, it was based on a Japanese film from 1954 called Seven Samurai, and was actually remade as recently as 2016. Small spoiler alert, but the end of the movie really reflects a Pyrrhic victory for the protagonists. A Pyrrhic victory is one where the victor suffers such immense losses in the battle, that it often negates any real sense of accomplishment.
With respect to the Magnificent 7 stocks, we are not sure if the ultimate result will not be that different from the one depicted in the original movie.
Since January of this year, the S&P 500 is up nearly 16%. A very solid return to be sure, but the performance of Magnificent 7 (M7) has been outstanding. NVIDIA, for example, the best of the seven performers, is up nearly 190% during the first half of the year. Meta and Tesla are close behind with 137% and 124% YTD returns, respectively. And, the others, have each gone up by more than 35%. If that was the whole movie, it would look like a nice ride into the sunset, but the story did not start in 2023!
Since we take a long-view approach to investing, we strive to see the big picture and advise clients on strategies that provide diversification and aim for moderate growth over full market cycles. The M7 demonstrate just how challenging this can be, especially in light of clickbait headlines that try to scare investors or promote a particular strategy that is not always in their best interest. While hindsight is always 20/20, we are recommending to clients today to maintain allocations and not chase “fad” stocks in hopes of an outsized return.
As evidence for why this strategy does not often work, we need to go back just two short years. If it was a movie we would see “two years earlier” on the bottom of the screen. Flashback to the second half of 2021, when the market and each of the M7 stocks hit an all time high. It was not all on the same day, but was over the course of a couple weeks. The Fed Funds rate was still less than 1%, but credit was starting to tighten, and growth companies like the M7 started to contract, quickly.
Our story now would cut to a montage of a brutal 2022 when each of the M7 was down more than 25%, some more than 50%, and Facebook and Tesla down 64% and 69% respectively. The S&P 500 itself came out of 2022 battered, but was only down about 18%.
2023 has certainly seen the Phoenix rising from the ashes, but not without consequences. In fact, even given the robust year the M7 have experienced, since November 2021 the S&P 500 has outperformed 4 of the 7 Magnificent 7 stocks.
The M7 represent an A-list ensemble cast, but they are not the only ones that had a good few quarters. In fact, Google and Microsoft were not even in the top 5% of S&P 500 performers during the first half of 2023. The other 5 are in the top 25 performers of the last 6 months, but other companies are there too. For example, several cruise companies are nestled into the top performers of the period (Carnival, RCL, and Norwegian with 130%, 107% and 75% returns, respectively).
The funds we use in constructing portfolios means that clients have exposure to these stocks as well, but they are miniscule relative to the M7 and thus have less of an impact on returns. If we knew which stocks were going to go up and when, we would change our strategy, but since we don’t know, we have to accept some smaller box office returns alongside the blockbusters.
In the end, we reiterate a common trope that as planners we seek to understand each client’s circumstances and needs and tailor the strategy appropriately. We need the right movie to fit the mood. The best way we can do that is by keeping exposure broad and adjusting as things change.
If you want more behind the scenes insights on your portfolio or explore what other screenplays might align with your goals, please reach out and we are happy to discuss.
DISCLAIMER: You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.