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By Ruan Breed*
The past few years have dealt rather harsh lessons to investors who have been driven by fear rather than reason. Going back to the start of the pandemic in 2020, global markets (led by the big US indices) have buffeted investors as markets have fallen precipitously and risen wildly in quick order.
To recap: 2020 started with a 30% sell-off in markets at the start of the pandemic, only for major indices to recover by October that year. This bullish sentiment continued in 2021 when the S&P 500 rose 27%, the Nasdaq reached an all-time high and the Dow Jones returned more than 18%.
However, any euphoria was wiped out in 2022 as interest rates started climbing in response to post-pandemic inflation. The S&P 500 lost 20% that year, with the Nasdaq falling nearly one-third and the Dow Jones declining by 9%. And then came 2023: S&P 500 +24%; Nasdaq +43%; Dow Jones +13%.
If ever you’ve wanted to experience a rollercoaster in two graphs, then you can tick that off your bucket list.
Where to in 2024?
The amazing turnaround in fortunes last year has been ascribed to that latest collective name given to stocks that are the current market darlings.
Let me introduce you to The Magnificent 7:
- Alphabet (Google)
- Meta (Facebook)
These giants of the S&P 500 produced returns in 2023 ranging from 50% to 240%, putting them amongst the top-performing stocks of the year. These stocks carry an extremely heavy weighting in the index, thus driving the S&P 500’s growth last year.
These dollar-denominated returns are especially mouth-watering for South African investors who would have benefited even further because the rand depreciated by roughly 10% over the same period.
It’s impossible to ignore the heavy tech slant of the members of the Magnificent 7, so it’s only reasonable to expect that they’ll continue to grow strongly this coming year. Right?
Some analysts, after reviewing recent CPI figures and interest rate expectations, are now saying: Not so fast on the bullish outlook.
The US CPI numbers released in the second week of January 2024 were slightly higher than expected at 3.4% vs the predicted 3.2%. Why is this a problem? The expectation at the end of last year was that the US Fed would start cutting rates this year, somewhat aggressively some thought, because inflation was retreating.
However, the latest numbers tell a different story: inflation might not be falling as expected, possibly forcing the Fed to keep rates higher for longer. Adding fuel to this argument is that jobless claims also came down, indicating a strong economy with employment on the rise and prices also going up.
So, rates might not be cut as aggressively as expected, nor as soon as had been hoped.
If this does happen, there will be consequences for stock markets because they typically reflect the earnings expectations of the listed equities. If rates remain higher, that could mean revenue could be lower than projected at the end of 2023 when inflation expectations differed.
Consequently, markets might run hot, which could lead to certain sectors becoming overvalued, especially on the tech and artificial intelligence (AI) side. Many of these stocks have enjoyed stratospheric growth on the back of the AI hype cycle, with many in the ‘Magnificent’ 7 fuelled by this euphoria.
It’s never easy predicting who the winners and losers are going to be. But, based on the rapid adoption of AI technology, it seems logical that companies producing or supporting the growth of AI will benefit enormously.
However, I believe it’s important to look beyond these darlings of the market to other value stocks that have shown the ability to deliver returns over the long term.
Diversification is key
The reason you should be looking at other stocks is not only to find those that will profit when rates and inflation start to come down. Your reason for considering other options comes down to the simple investment principle of diversifying your risk and opportunities.
The best way to do that is to sit with your advisor to find those stocks, indices or funds that allow you to spread your risk while simultaneously unlocking new opportunities. You might do this as part of your annual portfolio review, or if you’ve recently had a windfall or reached a milestone in your life that demands that you relook and reconsider your options.
I look forward to reviewing the events that unfolded in 2024 at the end of this year. Mainly because it’s easier to look backwards than trying to make sense of an uncertain future. The best we can do amid this uncertainty is to diversify our risk while keeping an eye firmly on the long-term goal.
Unlike last year, 2024 might not be dazzled by the Magnificent 7. But then it might. We just never know in advance. So, I wish you well in the year ahead and implore you to make informed rather than rash decisions.
Whenever you’re in doubt, rather reach out to a trusted or qualified advisor who can hopefully help guide your investment decisions in extremely trying times.
* Ruan Breed is a financial advisor at Brenthurst Wealth Stellenbosch and George. [email protected]