The Magnificent Seven

By: Aaron Anderson, CFP®, CFA, Managing Partner

June 30, 2023

Yogi Berra is often given credit for saying, “It's tough to make predictions, especially about the future.” In my last article about the debt ceiling debacle debate, I said we could have a technical default where the government continues paying bond holders while not paying for other things. I was surprised that they came to an agreement to avoid any default. Granted, they got a few concessions and then suspended the debt ceiling until January 2025 – conveniently kicking the can down the road until after the next election cycle. But, I was right that the government always pays its bills and continues to do so.

Besides that, the economy and the consumer continued to be relatively strong. Inflation continues to decline which caused the Federal Reserve to skip a rate hike in June, although they continued to reiterate that future rate hikes are still likely – they don’t want people feeling too happy, spend more, and increase inflation again.

As a result, the market continues climbing the wall of worry. This is the third positive quarter in a row for the market since the lows back in October 2022. It seems the market thinks that the Fed might be able to pull off a soft landing: getting inflation under control without sinking the economy into a major recession.

One of the interesting things about the current rally is that big tech has led the way with huge stock price increases this year. In fact, some have dubbed them the “magnificent seven”: Nvidia, Tesla, Meta (Facebook), Apple, Amazon, Microsoft, and Alphabet (Google).

I’m not sure which company is Yul Brynner, Charles Bronson, or Steve McQueen, but it seems a good analogy as those seven stocks have fought their way back this year “like seven hundred”.

The issue is people have used that as an excuse that the market is shaky. They say things like “without those seven stocks ... the S&P 500 would be down 0.8% on the year” and “prove” it by showing graphs like this one:

The issue with that logic is that these are some of the biggest companies in the world and have a disproportionate influence on the market-weighted S&P 500 index – in general, where they go, so goes the index. It also ignores the fact that 292 of the 500 stocks that make up the S&P 500 index are positive for the year [1]. Even though positive doesn’t mean above average, 137 of them have returns above the index itself. While this isn’t as broad of a rally as one hopes for, it’s definitely not a few stocks making all the gains.

The one real concern I do have is that the stock market tends to bottom and start recovering sometime during the middle of a recession [2]. So, if this elusive recession that many are expecting actually occurs, the bottom we hit last October may not be the lowest of this cycle – it would be odd for the bottom to happen before the recession even starts.

But, if the recession never happens or is extremely minor, then the market could already be looking past it, continuing this slow march upward. Plus, the market tends to recover before the economy so trying to time in and out around recessions is impossible, especially since the official declarations are always backward looking. By the time they call one, we could be out of it!

So, we continue following our plans recognizing that as long-term investors, we have traditionally been paid handsomely with extra returns for excess risk of being in the stock market and expect that to continue in the future.

Before our quarterly holdings discussion, I’ll start with the disclosures:

While we tend to use a similar investment mix across all accounts held with us [3], you may not hold some of these positions mentioned here – maybe it’s not appropriate for your goals and risk tolerance or maybe you didn’t have funds available at the time and we didn’t want to sell any of your holdings to make some available.
This is NOT a recommendation to buy or sell. It is an “after the fact” report of why we hold what we do. There is neither enough information given here to make an informed decision nor anywhere near the amount of analysis we do on our holdings or prospective holdings. You can of course assume that we have positive expectations for any of our holdings, otherwise we would have sold them. Beyond that, what is stated here is a backward-looking report at what occurred, not a forward-looking prediction of expectations.
We are long-term investors and so what happens quarter to quarter is not something to focus on. Our best performer one quarter might be our worst performer the next, so again, you should not make investing decisions based on what’s discussed here.

Better Performers

NVDA: Nvidia was again one of our better performers for a second quarter in a row. They had a phenomenal earnings report which saw a one-day stock gain of 25%. The concept of AI and Nvidia’s role in it has fascinated the public at large. You may have seen some selling in this stock in your portfolio – this is purely for prudent money management and profit-taking as we still believe in the future for this stock and company.
TSLA: Like Nvidia, Tesla is on our better performers list for a second quarter in a row. Some interesting news is that many electric car manufacturers have started working with Tesla to use Tesla’s charging technology in their cars. A standardized charging technology should help push EV adoption forward and it makes sense to use Tesla’s since they are so far ahead with their network of charging stations.
MTTR: After a brief flash of greatness, this one has been awful for us, but it was one of our better performers last quarter. They had a great earnings report with total revenue and subscription revenue above the high end of their guidance. They also have a strong balance sheet with no debt. Hopefully the market will take notice of this good company and the stock will perform again.

Underperformers

ENPH: Unfortunately, Enphase is on our underperformer list again. They had a great earnings report, but guidance stated they expected flat revenues and the same ~40% profit margins. The market didn’t like it, the stock dropped 25% overnight, and has been relatively flat since. As I said last time, we have been pretty successful trading it – most of us are up substantially on this one despite the recent volatility – and use these pullbacks as buying opportunities.
NTR: As one of the top fertilizer and potash producers in the world, we purchased Nutrien with expectations that the war in Ukraine would help it increase market share as people tried to make up for lost Ukrainian agricultural production. But, the price of fertilizer went down and thus the price of this stock went down with it. Expectations are demand for their products will increase so we believe in the long term prospects of this company and plan to collect the almost 5% dividend yield while we wait.

New Positions

None: We have not purchased any new positions this quarter. You may have a position in your portfolio that is new to you, but not a new holding for the overall firm.

Sold Positions

EEM: This is the iShares MSCI Emerging Markets exchange traded fund. While we still like to have some exposure to emerging markets, due to underperformance of this fund, we’ve decided to reallocate to other better performing funds.

[1] Source as of 6/30/2023: YTD Return of Companies in the S&P 500 (slickcharts.com)

[2] Source: Why investors shouldn't overreact to talk of a recession | Vanguard

[3]I say “similar” because we customize portfolios based on differing goals, risk tolerances, and timing of transactions. So, the size of positions and account performance, both in absolute and relative terms, will be different.

Content in this material is for informational purposes only and not intended to provide specific advice for recommendations for any individual. All performance referenced is historical and is no guarantee future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor's 500 Index is a capitalization weighed index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing includes risks, including fluctuating prices and loss of principal.

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.