July 9, 2024

Dear Friends:

Why the Magnificent 7 Stocks have been so magnificent and what is a Nvidia anyway?

One of our client’s children recently overheard our conversation about some of this year’s stock performance including Nvidia, and asked “What is a Nvidia?  Is that like Narnia?” Well, in a way yes – it is legendary but thankfully not imaginary!

In the late 1800s and through 1920, railroads were exploding across America as it settled westward.  As a result, railroad stocks were the market leaders for over 30 years until automobile stocks, such as Ford and GM took over market leadership.  Railroad companies were so powerful that President Teddy Roosevelt had his administration bring multiple lawsuits and passed two major laws to rein in the power of just a handful of rail companies that controlled a huge segment of the resources in the U.S.

Now 100 years later we find ourselves in a similar situation as the rise of AI (Artificial Intelligence) technology has driven growth in a limited few “Mega Cap” stocks (Apple, Nvidia, Alphabet, Microsoft, Amazon, Meta, and Tesla) which have contributed over 70% of the S&P 500 index returns for the year.  This run has been amazing but not unprecedented.  So, the question is – do we keep riding the wave?  There could be considerable risk to that strategy as Rob Arnott, Chairman of Research Affiliates recently quipped, “4 of the magnificent 7 in the famous 1960 film ended up dead!”  These companies are not likely to die, but there is a significant chance that several will underperform over the next 10 years or longer.

In 2000, at the height of the internet revolution and the “dot.com” bubble, Cisco Systems was predicted to be the main beneficiary of the internet exploding growth (and it’s stock soared), supplying most of the market-leading hardware to support the growth.  And as it turns out, Cisco has been the premier industry leader over the last couple of decades. So how has the stock of this juggernaut performed since 2000?  It’s still down 40% from its peak price reached in 2000, 25 years later! Ouch!

Our portfolios have benefited from the growth of the Mag 7.  Based on history, these trends can persist for long periods so the recommendation is not to completely abandon the Mag 7.  Instead, keep allocations appropriate while diversifying to take advantage of relatively attractive valuations and risk/reward profiles offered by other asset classes including small and value stocks as well as structured notes paying 8%-10% yields.  In this way, we target real and solid returns, maybe not legendary but certainly not imaginary!

2nd Half 2024 Election Impacts

Another popular question is “how will the November elections effect the markets?”  While it’s obviously difficult to predict with 100% certainty, we do believe it’s very reasonable to assume there will be volatility that may yield some opportunities to maintain “buy low/sell high” discipline and take advantage of what the market gives us without speculating.  In addition, there are many tax and estate strategies we will be discussing with clients and professionals, so feel free to reach out if you have questions.

As always, we are extremely grateful for each of you and thank you for your partnership!

Regards,

Mitch Anderson                                              Destin Tompkins