Navigating the Winds of Change

By Mark Zhuravlev, CFP® on February 23, 2024

The Surge to New Heights

The S&P 500’s recent break through the 5,000 mark underscores an extraordinary period of growth, fueled by 14 out of 15 weeks of positive momentum.^[1] Central to this rally are the “Magnificent 7” — seven mega-cap technology stocks that have led the market and showcased the transformative power of innovation and strategic investment. Over the past year, these companies have posted remarkable gains:

• Amazon: +82.25%
• Google (Alphabet): +57.22%
• Apple: +23.81%
• Microsoft: +63.67%
• Meta Platforms: +184.09%
• Tesla: -1.72%
• Nvidia: +278.42%
  ^[2]

This collective surge underscores a broader market trend: the Technology Revolution – a decisive pivot towards technology, with AI development at the forefront, symbolizing a deepened commitment to shaping a future anchored in digital innovation. Their combined performance dwarfs the rest of the index: ^[3]

The AI Revolution and Legislative Boosts

The “Magnificent 7” share a common thread in their significant investment in AI, whether in software, hardware, or both. The enactment of the 2022 CHIPS Act, earmarking approximately $280 billion for semiconductor R&D and manufacturing, along with the latest $5 billion administrative boost for R&D and workforce development, has provided substantial tailwinds for these tech giants. ^[4]

Anticipating Turbulence

Despite the tech exuberance, we hold balanced portfolios as several factors suggest a bumpy road ahead. Remember:

Despite the tech exuberance, we hold balanced portfolios as several factors suggest a bumpy road ahead. Remember:

We are in an Election Year: This year’s upcoming election cycle plays a key role. We anticipate another summer run this year as the Federal Reserve (coincidentally) is planning to start rate cuts around mid-year.

War in Israel & Ukraine: The continuing global conflict seemingly has no clear end in sight yet. As the US sends more funds to the affected fronts, Europe gears up on the defensive, and other countries support their agendas, tensions escalate, adding more layers of risk.

Real Estate and Credit Concerns: The commercial real estate sector faces challenges. At the same time, banks brace for potential downturns by shoring up reserves in anticipation of liquidity shortfalls, primarily due to real estate assets.^[5] The continued support from the Federal Reserve’s facilities hints at underlying vulnerabilities.

Economic Headwinds: Europe and Japan face recessionary pressures, with inflation lingering as a stubborn adversary. With the UK and Japan entering recession territory. Domestically, employment has plateaued: the US has only 1 million more full-time workers than pre-pandemic – over 4 years and is trending down.^[6] Inflation has cooled but remains with elevated prices and unaffordability for housing to essentials spreading. Household debt is higher than ever, and credit card and auto loan delinquencies are rising.^[7] Meanwhile, for businesses, an uptick in bankruptcies is signaling economic stress.^[8]

China Crumbling: The Chinese real estate market has been in turmoil with buildings coming apart from poor construction materials, followed by the developer companies crumbling down under mismanaged debt practices. Since the CCP has bailed out and supported key sectors of the Chinese economy to sustain the market with stimulus. However, its issues are far from over as now China faces extreme deflation with freefalling prices as consumers cannot afford higher prices, and producers must take losses to recover some liquidity. ^[9]

Where’s the Peak? The S&P’s top stocks hold the highest stock market concentration since the early 1970s (sum of squared stock weights). Their daily moves create or wipe market capitalizations equivalent to that of some other “large” $100+ billion companies. ^[10] We may not see another Dot Com Bubble with the recent AI craze, but even a moderate correction can erase trillions of dollars of wealth.

Forward Look: Strategies for Uncertain Times

While the current market rally, led by tech giants, illustrates the sector’s strength and potential, we must remain vigilant and prepare for volatility spurred by economic, political, and global factors. Therefore, we take profits from the exceptional performers, dollar-cost-averaging out of select sectors, and rotate into our other Competitive Edge selection – focusing on dividend payers and more ‘defensive-styled’ companies.

At the same time, our treasury ladders continue to perform well. Bringing in income and interest for low risk with a high relative return. We still watch corporate and municipal bonds for opportunities, but nothing has yet to usurp the dominance of the US Treasury in this cycle.

As always, we remain nimble and proactive in managing your life savings.

Best,

Joseph Feinberg, Tamara Stein, and Mark Zhuravlev

[1] FactSet. As of 2/16/2024
[2] FactSet. As of 2/22/2024
[3] NY Times.
[4] White House.
[5] Reuters.
[6] FRED, BLS.
[7] Bank Rate.
[8] Wall Street Journal.
[9] Geo Political Futures.
[10] Axios.