History shows the market's big winners rarely dominate two years in a row
The “Magnificent 7” conquered the investing landscape in 2023, more than doubling in value collectively. Like the “FANG,” “meme,” and “dotcom” crazes before it, what started as a cheeky moniker assigned to a handful of streaking stocks morphed into a must-own investment strategy all its own. Over the course of last year, the AI-powered septet of Amazon (up 81 percent), Apple (48 percent), Google (58 percent), Meta (194 percent), Microsoft (57 percent), Nvidia (239 percent), and Tesla (102 percent) were elevated into the seven wonders of the investing world.
By comparison, the S&P 500 – of which the Magnificent 7 make up more than 30 percent in terms of market cap – rose 24 percent last year, while the equal-weighted S&P 500 rang up 12 percent in gains for the entirety of 2023.
With all due respect to the “Nifty 50” of Wall Street yore, that’s just nuts!
Whether the Magnificent 7 will be able to achieve those monumental gains in 2024, or even come close, remains to be seen. History has shown that the market’s big winners rarely dominate two years in a row. As a result, the probabilities don’t favor a repeat performance, especially now that the secret is out and their earnings multiples are up. Way up. Nvidia, for example, finished the year trading at 65 times its trailing 12-month earnings.
So if it’s not the Magnificent 7 leading the way in 2024, what will it be?
“The Magnificent 7 had such a huge run-up because there was a large imbalance of buyers versus sellers. But as the year went on, that supply-demand imbalance dried up,” said Eric Amzalag, CEO and founder of Peak Financial Planning.
Amzalag believes health care and consumer staples stocks will be the big winners in 2024. Maybe not enough to earn their own pet name, but they will certainly see healthy gains in his opinion.
“If rates are lowered in 2024 as the consensus is forecasting, then these investment groupings, along with long-duration Treasuries, stand to benefit a lot,” he said.
Scott Bishop, managing director at Presidio Wealth Partners, attributes the extreme outperformance of the Magnificent 7 to exuberance (irrational or otherwise) over artificial intelligence. Nevertheless, now that AI is no longer the shiny new object mesmerizing the investing public, he expects those big-cap behemoths, as well as the rest of the S&P 500, will underperform in 2024 compared to 2023.
“I think the economy may slow down and some sectors may do materially better than others,” Bishop said. “Some of the lesser-performing sectors like energy and industrials may outperform on the next leg up.”
GO LONG LNG, RIGHTEOUS REITS
Jonathan Swanburg, president of TSA Wealth Management, points out that past performance may not be indicative of future returns, but, anecdotally speaking, the worst asset classes of one period tend to be some of the best performers of the next and vice versa. In his view, that means real estate investment trusts could be the new FANG (short for Facebook, Amazon, Netflix, and Google) in the coming year.
“2022 and 2023 were both bad for the REIT market so if I were placed in a casino and forced to pick a US asset class positioned to outperform in 2024, then REITs would be a decent choice, especially for investors that see interest rates falling over the course of the year,” Swanburg said.
Matt Chancey, certified financial planner with Micel Financial, has another acronym on his mind: LNG, aka liquified natural gas, especially with export terminals coming online.
He’s also a big believer in bonds, where he believes “yields have a better chance of going down than up.”
“I always try to ask myself, ‘What got crushed this year that could bounce back next year?’ In 2009 and 2010, it was bank stocks. In 2020 it was airlines, cruises, and travel,” said Chancey. “Bonds got crushed in 2023, so that is a good place to look for outperformance.”
ALL THAT GLITTERS IS NOT CRYPTO
Gold certainly shined in 2023, rising an impressive 13 percent in response to a variety of factors including central bank buying and an uncertain geopolitical environment. Those gains could accelerate in 2024, perhaps even to “magnificent” levels, according to some advisors, as the Federal Reserve begins its rate-cutting program.
“While many still debate between a recession or a soft landing, it’s worth noting that gold has averaged 20.2 percent returns during the past seven US recessions,” said Eric Sterner, chief investment officer at Apollon Wealth Management.
Within client accounts, Sterner allocates commodities exposure via ETFs or mutual funds to increase the diversification of the overall portfolio. He says the allocation can reach up to 7 percent based upon the client’s objectives and risk tolerances.
Sterner added that he is keeping a close eye on bitcoin, which rose 150 percent in 2023, but he wouldn’t recommend it as a substitute for gold – just yet.
“I believe more regulation should be developed and implemented to oversee cryptocurrencies before I would recommend those investments in any client portfolio,” said Sterner.
Similarly, Eric Beyrich, co-chief investment officer at Sound Income Group, expects gold prices to rise in 2024 as interest rates fall, global uncertainty remains elevated, and concerns over the integrity of fiat currencies grow.
Like Sterner, he doesn’t see bitcoin as a substitute for gold because of its lack of intrinsic value. He does, however, see it as a vehicle for those investors who proverbially want to “go for the gold.”
“We view it as a speculative digital creation that appreciates or depreciates based on supply and demand dynamics. If people want to speculate on bitcoin, that is their choice. We are in the income-generating investment business and try to avoid speculations, to the extent possible,” Beyrich said.
