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Friday’s trade… are we entering a new phase of the bull market?
I believe we are. “One size (or group) fits all”, the crowding into a trade like we’ve seen with big technology, can usually work for a while in the market but never is a long-term investment solution.
What we now know as “the magnificent seven” (Apple (AAPL), Alphabet (GOOG) (GOOGL), Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (META), Tesla (TSLA), and Nvidia (NVDA)) has become the “go to” group for those seeking high-quality growth without economic sensitivity of smaller or more cyclical companies in uncertain economic times.
It’s a parking lot for those who want to be in the market but are fearful that the Fed, with its current interest rate profile, will cause us to go into recession or worse.
Friday’s action in the NASDAQ composite versus the Dow Jones Industrials, the S&P 400 Value Index and the Russell 2000 may be a harbinger of a change whereby the market is becoming more comfortable with rates being “higher for longer”… that the current rate picture may not be a killer of the smaller or more economically sensitive stocks in these indices.
This is an encouraging sign that a beneficial broadening phase has begun and that the market may have overdone the antidote… loading up on supposed, dependable high-quality growth stocks.
The Divergence
On Friday, the NASDAQ composite index closed down 2.05% while the S&P 400 mid-cap index closed up 0.39%, the Russell 2000 closed up 0.24% and the Dow closed up 0.56%.
Tesla hit a 52-week low. Market darling Nvidia was down 10%, with the stock entering bear market territory vis a vis its March 8 key reversal day high of $974 (We called this out in our March 11 post).
Netflix collapsed 9% (down 13% since April 8). The bulletproof case may be unwinding as the economic sensitivity case against everything else appears to be on the ropes. The “mag 7” ain’t everything it’s cracked up to be.
The Message
The Fed message of “higher for longer” has not killed and does not appear to be killing the goose that lays those golden eggs. We’ve been living with these rates for over a year and continue to grow employment, wages and the economy.
At year-end 2023 “mag 7” market capitalization was $12 trillion, 30% of the entire S&P 500 market cap. By comparison, the Russell 2000 index had a total market cap of $3 trillion and the S&P 400 value index was only $2.7 trillion.
Bleed $3 trillion from the “magnificent 7” to small cap and value, and you have tremendous potential for growth in the have-nots. That’s not to mention the potential for new money coming off the sidelines in a more confident market. The opportunity away from the “magnificent seven” appears to be very large and still intact.
What do you think?
