One of my financial planning clients saw an ABC commentator saying and showing enough to ‘frighten’ him to ask whether he should remain exposed to the stock market. This client had just made close to 15% for the year for his super fund and I guess he had to ask the question.
His return was good considering the Australian stock market’s capital gain (as measured by the S&P/ASX 200) was up only 9.05% for the year. The market is by definition 100% exposed to stocks but my client is now only 70% exposed to stocks. At the start of the year, he was less exposed but because his portfolio has done so well, he now has more assets in stocks (or growth assets).
Over the past two years, the overall local market is up about 15%, which isn’t enough to spook me. Compared to the US stock market, our shares have lagged behind. In contrast, Wall Street’s S&P 500 index is up 24.64% for the past year. Over the past two years, it’s up over 45%!
Now the ABC report focussed on some expert who was predicting that negative times were heading for Wall Street and undoubtedly the big tech stocks called the Magnificent Seven (M7) i.e., Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
These have not only seen their own stock prices boom ever since there was talk of rate cuts in the US in 2023, they’ve also driven the S&P 500 index up as well because of their size and influence on that index.
Over the same time, the Nasdaq (that captures most of the hi-tech companies in its index) was up around, wait for it, 60%!
Take these seven stocks out and the overall US stock market hasn’t done as well. In February, forbes.com reported the following: “Dating back to the end of 2022, the median return of the 493 S&P components not included in the magnificent seven is 13%, far below the S&P's 35% return owing to the magnificent seven’s average return of 154%”.
So, while the US market rise numbers look worryingly high, the other companies have only had moderate rises and, like many of our companies, are overdue for a rise. Therefore, the next question has to be: what will help the other 493 stocks gain over the next year or two, to render the ABC’s scary report less worrying?
Many of these other non-M7 companies were smacked (share price-wise) when the Yanks copped 11 interest rate rises and they’ve been waiting for a time when lower inflation in the US would drive rates down.
Part of the reason why US stocks generally have done well in recent weeks is the belief that the Federal Reserve is very likely to cut rates in September. The central bank boss, Jerome Powell, has reacted to good inflation data and he left market messages such as:
Powell isn’t a softie, and we’ll hear from him this week when he speaks at the Economic Club of Washington. Big market players will hang off every word. There’s also a swag of economic data out this week in the US, including retail sales, industrial production and the leading index of the US economy.
Right now, the money markets expect there is a 93% chance of a rate cut in the US in September, which could be the start of another leg up for US stocks as lower interest rates will be good for many of the 493 companies that have struggled since rates were pushed up.
At the same time, there could be selling of the M7 stocks to buy those companies in the 493 group, so there could be ‘ups and downs’ for the index, but I can’t see the M7 stocks being dumped so hard that the US market crashes. And it’s crashes that my client should worry about.
Right now, the M7group and some other tech companies have a tailwind for their stock prices called Artificial Intelligence or AI. This is in its early stages. AI companies will benefit from lower interest rates as well and so will their customers.
Historically, stock markets rise when interest rates are cut, especially so if there’s little fear about a looming recession.
And I’m not alone in my optimism for stocks for the next year or so.
Chief investment strategist, John Stoltzfus, at US investment bank Oppenheimer Holdings, raised his year-end S&P 500 target to 5900 from 5500. That index is now 5615.35. “Stoltzfus noted that artificial intelligence has sparked a mindset shift in the market that’s driven ‘not so much by fear and greed but a need to invest for intermediate to longer term goals. This change could benefit the 11 S&P 500 sectors as this ‘innovation cycle’ shows signs of being both ‘cyclical and secular coupled with cross generational demographic needs’,” he told CNBC.
Meanwhile, history has shown when stock markets hit all-time highs (like now), they keep hitting those highs until scary things happen, such as rising rates, a recession or a ‘surprise’ from financial markets.
Right now, I expect some ‘ups and downs’ for stocks but on a rising trend, as lower interest rates help lots of companies and consumers in the US. Eventually, we’ll see lower inflation and falling interest rates and that will lift our stock market, but we’ll benefit from Wall Street lifting on those lower rates.
This time next year, with a new US President, I could say “enough is enough” for being long stocks. Then I could easily go defensive and income-chasing. But right now, I wouldn’t be afraid of reports of negatives ahead from an ABC commenatator.