It’s been a rough quarter, mostly for Tech stocks – more specifically, the “Magnificent 7” stocks. The market has been struggling to price in the uncertainty coming out of D.C., as well as hints of an economic slowdown that we’ve discussed previously.
I’ve said many times before – the market loves good news, can rapidly price in bad news, and struggles with uncertainty. Well, there’s no question that we have had our fair share of uncertainty since January 20th.
The aforementioned Mag 7 group of stocks had a particularly hard time since the inauguration. So far, those seven stocks, represented by the “MAGS” index shown below, are down over 16% year-to-date, taking a big bite out of the strong performance seen the year prior.
With price to earnings (P/E) ratios of >2x the rest of the market, it’s possible there is more downside in these stocks.
Meanwhile, if you look at the equal-weight S&P 500 index, it is down less 2% for the year (quarter). Now don’t get me wrong, there has been volatility in the indexes and with many people owning nothing more than the S&P and a high percentage of the Mag 7, they are seeing an uncomfortable amount of red on their screens and in their account statements here at quarter’s end.
The financial shows, while mostly just trying to sell advertising, are stoking the fear from those seven stocks and other widely owned tech companies. How about this company shown below? Great company, but the stock was highly priced and still is at over 120x earnings.
For those of you who don’t know what stock it is, it’s Broadcom. Down around 30% this year alone. Does it have more room on the downside to go? Likely if the market keeps going.
Meanwhile, the XLU (utilities index) that we own is up almost 4% for the year.
Since November 21st, we have had more cash, more fixed income, and more “conservative” stocks (like utilities), which have proven to separate us from the S&P 500 and the Mag 7. It doesn’t mean we won’t lose money, but it will likely mean we will lose less (potentially much less) than the S&P 500 and the Mag 7.
Meanwhile, our green shoots are continuing to grow. One of the potential good indicators has to be the Leading Economic Indicators (LEI). The 6-month growth rate continues to be above the “recession” level, although it’s not a certainty that this sticks. It’s just one more green shoot.
Finally, a good contrarian indicator is to look at the “fear” index. Usually, it is best to zig when others are zagging, and vice versa. Here is the CNN Fear and Greed Index.
It sits in the extreme fear range, although up slightly from a month ago. It’s likely good for a bounce at some point. Whether that bounce turns into something more will tell us whether our green shoots turn into real plants. That is to be determined at this point.
Wrapping up, The Final Four is all set (all four #1 seeds are still in, the first time since 2008 and only the second time ever!). It should be a good end to the tournament this coming Saturday and Monday. If you have any questions or are losing any sleep, please reach out and we will be happy to have a conversation.