Investment Commentary - July 2024
Glen Eagle Investment Commentary July 2024
As we enjoy the summer of 2024, it is hard not to feel happy with the stock market’s performance of 15.3% through the first six months of the year. Yet, as we wrote in our last newsletter, the market’s performance continues to be driven by the “Magnificent Seven” stocks of Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, and Tesla. To put this in context, these seven “magnificent” stocks have done so well that their combined value is now larger than the entire market capitalization of China, Japan, or India.(2), and looking one level deeper, we see that Nvidia alone has accounted for an astounding 44% of the S&P 500’s gains since early 2022.(1)
This extreme outperformance of a few companies and the focus on AI have distracted investors from lurking risks and attractive opportunities that exist beyond the Magnificent Seven stocks:
Risk – Resurgent Inflation: Many investors are celebrating a premature success in the battle to bring inflation down. While the Federal Reserve has been able to bring inflation’s growth from 9.1% in 2022 to 3.0% today, the struggle is not over due to three key factors:
• Housing: Today, a record 63% of mortgages have a fixed rate below 4%. This means the Federal Reserve’s high interest rates are not impacting the majority of homeowners, unlike in the past. This is one reason why consumer spending continues to be strong. Since spending and consumption account for 70% of our economy, it is unlikely that inflation will hit 2% until American households begin to feel financially constrained.
• Geopolitics: The conflict in Gaza continues to add upward pressure on inflation. Cargo ships are now routing themselves around the Red Sea to avoid attacks from terrorist groups. This diversion adds additional time and costs to transportation companies, which then pass those costs onto the consumer. As a result, global shipping costs are now 5x higher today than they were a year ago.(3)
• Political Policies: Despite the Federal Reserve’s attempt to slow down the economy, political leaders have been mitigating their efforts through their policies. One only needs to look to the recent passage of the IRA and CHIPs Act, which together authorized the government to spend $201 billion. Additionally, both political parties have signaled a willingness to use tariffs to protect American interests going forward. Regardless of the societal or political merits of such actions, the economic outcome is higher prices for consumers.
o Investment Implications: If inflation does not return to 2%, the Federal Reserve will not be able to aggressively decrease interest rates. Smaller companies, in particular, are at risk. 60% of the debt held by the smaller companies in the Russell 2000 index has floating-rate debt compared to just 27% of the debt held by the larger S&P 500 companies. Larger companies are likely to continue giving investors more security as volatility picks up in the second half of the year.
Opportunity – Diversification: The Magnificent Seven stocks now represent 32% of the entire S&P 500 stock index. This overconcentration has increased the inherent risk in many investors’ portfolios, but it has also increased the attractiveness of other overlooked opportunities in other sectors and internationally.
• International: Ten years ago, the US stock market represented just over 35% of the world stock market. Today, due in large part to the dominance of our largest technology firms, the US stock market represents close to 50% of the global stock market even though, as a nation, we only produce 25% of the world’s goods and services.(4)
• Sectors: Over three decades ago, in 1993, the technology sector represented just 6% of the stock market.(5) Since then, the sector has grown to be larger than real estate, materials, utilities, energy, consumer staples, and industrials sectors combined! (6)
o Investment Implications: In this environment, it is crucial that investors maintain adequate exposure beyond the few US stocks that have achieved superb performance in the last few years. Investors who are susceptible to a recency bias may not only increase their portfolio’s risk profile, but they may also hurt their performance.
As we conclude this newsletter, we are reminded of a quote by Warren Buffett’s renowned mentor, Benjamin Graham, who once said, “The investor’s chief problem – and even his worst enemy – is likely to be himself.” Our emotions, both on the optimistic side, through extreme exuberance for artificial intelligence, or on the pessimistic side, when we fear the worst during a market correction, often lead us to make sub-optimal investment choices.
As we enter the next few months, we believe it is likely that market volatility will increase due to risks both at home and abroad. As a result, this is the time to diversify our portfolios and review our risk tolerance. Yet, we should also enter the next few months knowing that the best thing we can do as intelligent investors is not allow our emotions to take actions that ultimately prevent us from achieving our financial goals.
We wish you and your family a happy, healthy, and safe rest of your summer,
The Glen Eagle Investment Team
Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, an SEC Registered Investment Advisor; Glen Eagle Wealth, LLC, Member FINRA & SIPC. The information presented is believed to be factual and up to date, but we do not guarantee its accuracy and is subject to change without notice. Commentary is for informational purposes only and is not meant to be investment advice or a recommendation of securities to any individual . It is not prepared with respect to the specific objectives, financial situation, or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed in this commentary.
1. WSJ - "Nvidia's Success Is the Stock Market's Problem" 2. Charles Schwab “Chart in a Minute” 3. Barrons - "Shipping Rates Spike, 6 Triggering Inflationary Fears" 4. Bespoke - "This Week's Can't-Miss Analysis + Bespoke 50 Update“ 5. Bespoke – “From 6 to 29 in 6 years” 6. S&P Dow Jones Indices “S&P 500: Sector Breakdown”