As many of you already know, Nikola Swann, analyst with Standard & Poor’s (S&P and Moody’s are the two top credit rating firms in the US), downgraded US Treasury debt to AA+ back in 2011. As a reference point, the S&P 500 opened 2011 at 1282.62, leading me to believe that the downgrade had little negative impact on US equity prices. The current iteration from Fitch, the #3 corporate credit rating agency, other than shining a light on our continuing debt issues, should likewise be meaningless.
Meanwhile, the economic news continues to be good despite a 525-basis point increase in the Federal funds rate in the past year and a half. We added 187,000 jobs in July. The unemployment rate dropped back to 3.5%, and wage growth on an annualized basis came in at 4.4%.
Fed and media chatter attempts to cool the bull
We have a new voice from the Fed, Kansan Michelle Bowman. “Fed’s Bowman says more U.S. rate hikes likely will be needed.” Bowman, a Fed governor, is a voting member of the FOMC. She addressed the Kansas Bankers Association Saturday August 5, and it made headlines. Here are a few more sobering headlines from my weekend reading (attempts to disabuse us of our positive viewpoint):
“The Fed Eventually Will Disappoint Wall Street and Main Street”
“It’s Too Early to Call a Soft Landing”
(You will need a Wall Street Journal or Barron’s subscription to access.)
The point to be made here is that even after a string of new 52-week highs on the Dow Jones Industrials, continued good economic news after a continual ramp in interest rates, the media continues to accentuate the negatives. The more things change, the more they stay the same. It has been that way since this upturn began in March 2009.
Should we be worried? Maybe.
No… but… even though I think the vast majority of stocks and the market are fine and investible, my qualified “maybe” stems from the fact that almost 28% of the market cap of the S&P 500 resides in 7 stocks, the “Magnificent 7” (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Amazon (AMZN), Meta Platforms (META), Nvidia (NVDA) and Tesla (TSLA)). Last year, the Nasdaq Composite was down 33.1%. Year-to-date 2023, the index is up about 33%, but still nowhere near its 11/22/2021 high of 16212. The index would need to tack on over 2300 points, an additional 17%, just to get back to its peak. Meanwhile, the market appears to be broadening out, as evidenced by the recent string of new 52-week highs in the tech-lite Dow Jones Industrials. That index is only 2.5% away from the all-time high it reached earlier this year. Another indicator of this change in the wind would be the performance of the ARK Innovation Fund (ARKK; -$45.22) (all tech and innovation stocks). The fund peaked at $159.70 in the first quarter of 2021. Although the fund is up 45% year-to-date, it is still down 71% from its peak. This continues to suggest to me that the market bifurcation away from mid-cap, value and small cap over the last four or five years may be reversing, with money moving back into those previously unloved areas and away from tech and innovation. You can have a great market without the tech leadership.
Ergo, if you are heavily invested in the Mag-7 plus tech and innovation, it might be prudent to do some repositioning to the areas that have not been in favor (the road less traveled). There’s lots to chose from given the 12,000 companies currently registered with the SEC… 11,993 if you don’t count the Mag-7.
I think we may have seen this movie before… ‘Magnificent Seven’ reminds me of “Nifty Fifty”.
What’s your take?
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