— Friday’s trade makes you wonder if the game is not over for the “Magnificent Seven”.
— There appears to be a real divergence going on between those stocks that are considered economically sensitive and those previously considered ‘bullet proof’–Big Tech.
— The market seems to finally be getting comfortable that the Fed message of “higher for longer” is not a death sentence for small cap and value stocks and that ‘growth at any price’ may not be the best path forward.
Friday’s trade … are we entering a new phase of the bull market?
I believe we are. “One size (or group) fits all”, the crowding into a trade like we’ve seen with big technology, can usually work for a while in the market but never is a long term investment solution. What we now know as “the magnificent seven” (Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (META), Tesla (TSLA), Nvidia (NVDA) has become the “go to” group for those seeking high quality growth without economic sensitivity of smaller or more cyclical companies in uncertain economic times. It’s a parking lot for those who want to be in the market but are fearful that the Fed, with its current interest rate profile will cause us to go into recession or worse.
Friday’s action in the NASDAQ composite versus the Dow Jones Industrials, the S&P 400 Value Index and the Russell 2000 may be a harbinger of a change whereby the market is becoming more comfortable with rates being “higher for longer” … that the current rate picture may not be a killer of the smaller or more economically sensitive stocks in these indices. This is an encouraging sign that a beneficial broadening phase has begun and that the market may have overdone the antidote … loading up on supposed, dependable high quality growth stocks.
The Divergence
On Friday the NASDAQ composite index closed down 2.05% while the S&P 400 mid cap index closed up 0.39%, the Russell 2000 closed up 0.24% and the Dow closed up o.56%. Tesla (TSLA) hit a 52-week low. Market darling Nvidia was down 10%, with the stock entering bear market territory vis a vis its March 8 key reversal day high of $974 (We called this out in our March 11, post). Netflix (NFLX) collapsed 9% (down 13% since April 8). The ‘bullet proof case may be unwinding as the economic sensitivity case against everything else appears to be on the ropes. The “mag 7” ain’t everything it’s cracked up to be.
The Message
The Fed message of “higher for longer” has not killed and does not appear to be killing the goose that lays those golden eggs. We’ve been living with these rates for over a year and continue to grow employment, wages and the economy.
At year-end 2023 “mag 7” market capitalization was $12 trillion, 30% of the entire S&P 500 market cap. By comparison the Russell 2000 index had a total market cap of $3 trillion and the S&P 400 value index was only $2.7 trillion. Bleed $3 trillion from the “magnificent 7” to small cap and value and you have tremendous potential for growth in the have-nots. That’s not to mention the potential for new money coming off the sidelines in a more confident market. The opportunity away from the “magnificent seven” appears to be very large and still intact.
What do you think?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.
Good article . It was inevitable that the large darlings would have to come back to earth at one point . As for the smaller growth stocks I think the interest rates are hurting them. The high rates are counter productive and causing inflation in higher rents and building costs for one . Higher rates of capital are adding to inflation of increasing pricing as well . The FED is not going to reach there target !
I agree Fed inflation target unreachable. Disagree about current rates being to high and stifling the economy. rates were historically low because of two emergencies–the financial crisis and covid. without those two elements rates would have been much higher. We should be ok with a 4 to 5% ten year treasury (the 10-year was at 6% before the break in 2000–The PE on the S&P 500 was 30X). The economy and business will be fine. inflation historically low because of 3 decades of globalization. That’s done now. If I am wrong please explain the fact that we have had over a year with current high rates (and they are really historically low vs decades pre fin crisis rates) with low unemployment, growing economy and no recession.