By: Sheila Morgan
Imagine 2023 unfolding like the plot of the classic Western film, The Magnificent Seven. In this cinematic journey, the markets are like the rugged landscapes traversed by The Magnificent Seven, each day akin to a thrilling showdown. As astute investors, we must strategically navigate the markets each day, prepared for whatever “showdown” comes our way. The key is to arm ourselves with knowledge and wisdom to emerge victorious. As we reflect on a year past and consider the one ahead of us, we can’t help but pay homage to the legendary Vice Chairman of Berkshire Hathaway, Charlie Munger, who once said, “Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well, and systematically you get ahead, but not necessarily in fast spurts…And at the end of the day, if you live long enough, most people get what they deserve.” His wisdom and charisma will be missed.
In 2023, the market fell into correction territory, which is typically defined as a 10% decline from the previous peak. From the end of July through October 30, the S&P 500 pulled back 10.3% due to concerns around rising interest rates, Fed policy, new geopolitical risks, slow growth in China, and political uncertainty in Washington. Last year, the S&P 500 gained 26.3%, with Apple paving the way for an all-time high and becoming the world’s first $3 trillion company.
Move over, FAANG! Today’s “Magnificent Seven” took over the markets in 2023. Representing the seven largest companies in the S&P 500 Index, Alphabet, Apple, Meta, Microsoft, Amazon, Tesla, and Nvidia have been leading the market and tech rally since the first half of 2023. The “Magnificent Seven” certainly made their mark, reshaping the landscape of the market. This group gained 87% on average in 2023, contributing significantly to the returns of both the Nasdaq and S&P 500 Indices. In fact, much of the US market’s gains came from just 10 companies, which included all the members of the “Magnificent Seven.” All that glitters is not gold; when seven stocks make up more than a quarter of the US market, and nearly 40% of its volatility, it represents a substantial risk to investors.
What’s more important is that rebounds often occur suddenly and unexpectedly, just as they did in mid-2020, and earlier this past year after the banking crisis. Trying to time a reversal perfectly often backfires since it means missing the earliest part of a recovery. Of course, the past is no guarantee of the future, but this is a reminder for us to stay focused on the long run and not get caught up in short-term market movements. The “Magnificent Seven,” are far from magnificent when we see reversals in the market. Not only did they lead declines in the recent market pullback, but they lost nearly half their value during the prior year’s bear market, driven by inflation and Fed rate hikes.
History shows that rebounds often arrive when we least expect them. The challenge is prudently investing in a fully valued market. So, as we navigate the ever-changing currents of the financial world and contemplate another year behind us, let us heed Munger’s timeless advice and approach each day with the goal of growing a little wiser by cautioning ourselves against following speculative trends in the markets and remaining faithful to a long-term investment approach that encapsulates making smart investment decisions based on solid fundamentals and earnings.
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