Milan Cacic
December 01, 2023
Financial literacy Social media Economy Commentary Weekly update Weekly commentaryA LITTLE LOPSIDED!
November turned out to be a pretty good month for the markets. Maybe the fact that interest rates started to fall back to earth had something to do with it. One other thing to note is bonds and interest-sensitive stocks started to participate in the uptrend.
So far this year, there have been 7 stocks that have driven almost all the growth in the market: Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia and Tesla. You may have heard analysts refer to them as the “Magnificent 7”. As you can see from the chart below, these 7 stocks are up approximately 80% this year while the remaining 493 components of the S&P 500 have had a relatively flat performance. When market performance is largely dominated by a small number of stocks like this, we say there is narrow market breadth. Normally, it is best when most of the S&P 500 components are rising, not just 7 of them!
Note: The S&P7 is the Magnificent 7: Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, and Tesla
Source: Bloomberg, Apollo Chief Economist.
This narrow market breadth led by mega cap stocks is reminiscent of two previous cycles – in the early 1970s, when investors only trusted a few big blue-chip stocks, and in the late '90s, when high-flying tech stocks created the tech bubble. In each case, somewhat counterintuitively, the underperforming S&P components only started rising once a recession started (likely because interest rates started coming down). Combine this with the fact that Canada is on the edge of recession, with some analysts believing we are in the start of one already, and US rates signaling a US recession, and maybe it is time for these laggards to perform.
I want to be clear that this doesn’t mean the Magnificent 7 would have to drop, it could also just mean that the other components start to participate more heavily. I guess we will find out over the next couple of months.
I've also included a piece from our CIBC Economics team entitled "Yes, we have some bananas".
As always, if you have any questions, please feel free to give us a call at any time.
Have a great weekend.
Milan