The Clash Against The Magnificent Seven
Never before has the S&P 500 been this top-heavy.
The seven largest companies by market capitalization (Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, and Tesla) comprise more than 29% of the S&P 500 index. These companies dubbed the “Magnificent Seven” have performed very well in 2023.
The Only Band (of stocks) That Matters?
A November 14th Goldman Sachs report shared that the Magnificent Seven have gained 71% this year while the other 493 stocks in the S&P 500 have gained just 6%.
Given market cap distribution, which allows larger stocks to contribute more to the index's movements, the S&P 500 has gained +19% this year.
Thus, if one owns the other 493 stocks but not the Magnificent Seven, they’re trailing the S&P 500 Index by ~13%.
“Di-worse-ification”?!
As for other asset classes YTD through 11/14:
+9.1% - MSCI EAFE (International) Index.
+7.5% - Gold.
+5.1% - Dow Jones Industrial Average (Apple, Microsoft are components).
+5.0% - MSCI Emerging Markets Index.
+3.4% - U.S. Small Cap (Russell 2000) Index.
+0.4% - U.S. Aggregate Bond Index.
-0.6% - Morningstar U.S. Real Estate Index.
What of dividend stocks? Vanguard’s Dividend Appreciation +7.9% trails S&P 500 Index by ~11% even though its largest holdings Apple and Microsoft are ~9%. It can’t own other Magnificent Seven stocks because they don’t pay dividends (yet).
Before asking, what about NASDAQ 100’s +34.6%? Understand, Magnificent Seven are 44% of that index’s 100 stocks.
Death or Glory.
Yes, Magnificent Seven 2023 returns are eye-popping, but let’s review 2022 then add together for net total return (not average) from 01/01/22 -11/14/23.
Apple: 2022 -26%; 2023 +45%; Net +7%
Microsoft: ‘22 -28%; ‘23 +56%; Net +12%
Amazon: ‘22 -50%; ‘23 +74; Net -13%
Alphabet: ‘22 -39%; ‘23 +51%; Net -8%
Nvidia: ‘22 -51%; ‘23 +240%; Net +69%
Meta: ‘22 -64%; ‘23 +179%; Net 0%
Tesla: ‘22 -65%; ‘23 +93%; Net -32%
Still, since 2018 the Magnificent Seven have outpaced the S&P 500 and Nasdaq 100. Not the first time a concentrated group of tech stocks outperformed 5 years to sit near the top of S&P 500.
The Four Horsemen.
In the late 90s, Dell, Cisco Systems, Intel and Microsoft were deemed The Four Horsemen.
To end 1999, the Top 10 S&P 500 Index holdings were - Microsoft, General Electric, Cisco, ExxonMobil, Wal-Mart, Intel, Lucent, IBM, America Online and Citigroup. Notice 7 out of Top 10 were technology. Dell was #18, between Nortel Networks and MCI Worldcom.
A “What Happened To…?” article should be done, but understand from 2000-2009, aka “The Lost Decade”, the S&P 500 Index lost -9%. The best performing Four Horseman, Microsoft, had a -36% decline for 2000s.
Diversification and Equal-Weight At Work.
If S&P 500 was negative for the 2000s, so was everything else. Right?
Nope.
Per indices cited previously, Gold returned +274%, U.S. REITs +162%, Emerging Markets +154%, U.S. Bonds +85%, U.S. Small Caps +44%, and International stocks was +12%.
Additionally, the Equal-Weight S&P 500 Index was +65% for the 2000s.
An equal-weight index is when all components are weighted equally. In today’s terms, a Magnificent Seven stock impacts the same as Lululemon, Hubbell and Blackstone, all recently added to S&P 500 Index.
Should I Stay or Should I Go?
This isn’t to say sell this or buy that, as everyone’s situation is different with goals, taxes, risk tolerance and timelines. It’s to help educate, understand what you own and why you own it.
You should go to your CFP for your customized recommendations.
In italics:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.
This article appeared in the April editions of Local Town Pages for Holliston, Natick, Ashland, Franklin, Hopedale, Medway/Mills, Bellingham, and Norfolk/Wrentham. Additionally in 1st weekly edition of Community Advocate for Shrewsbury, Westborough, Northborough, Southborough, Grafton, Marlborough, and Hudson.
Please call me at (508) 834-7733 or directly schedule a meeting to learn more about considerations for planning and investing so you can balance kids, aging parents and your financial independence.
PlanDynamic, LLC is a registered investment advisor. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain a better understanding of the subject or the article. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.
Market data and other cited or linked-to content in this article is based on generally-available information and is believed to be reliable. PlanDynamic, LLC does not guarantee the performance of any investment or the accuracy of the information contained in this article. PlanDynamic, LLC will provide all prospective clients with a copy of PlanDynamic, LLC’s Form ADV2A and applicable Form ADV 2Bs. You may obtain a copy of these disclosures on the SEC website at http://adviserinfo.sec.gov or you may Contact Us to request a free copy via .pdf or hardcopy.