Keystone Financial Group

Seth Edgil

Recessionary Fears and the Magnificent Seven

Navigating the Economic Landscape

As a financial firm dedicated to guiding our clients through the ever-changing economic landscape, we have been closely monitoring recent market trends and the performance of the S&P 500 index, including the “magnificent seven”. While the overall growth of 18.91% in the index this year is promising, it is vital to recognize that economic challenges still loom large, and the threat of a recession persists.

S&P 500’s Performance Analysis

The S&P 500, an index comprising 500 major companies listed on various stock exchanges, has undoubtedly seen positive growth in 2023. However, a deeper analysis reveals a striking disparity in performance among its components. According to market research firm YCharts, the S&P 500 had a total return of -18.11% in 2022, which contrasts with the current year’s significant growth (Source: YCharts, S&P Global).

Dominance of the Magnificent Seven

The market’s current surge has been driven primarily by seven companies—Apple, Tesla, Meta, Alphabet, Nvidia, Amazon, and Microsoft—that have become known as the “magnificent seven.” Their combined market capitalization now accounts for approximately 26% of the entire S&P 500 index, showcasing the immense weight the magnificent seven hold. (Source: Yahoo Finance).

Their success can be attributed to their involvement in the transformative field of artificial intelligence (AI). Although AI is a revolutionary technology with great potential, it is still in its infancy, and as with any emerging technology, investing in AI carries inherent risks for investors.

The Risks of Overweighting

A concerning trend that has emerged is the phenomenon of overweighting, where institutional money managers heavily concentrate their holdings in the magnificent seven stocks to ensure positive fund returns. This over reliance on a single sector can create vulnerabilities and potentially lead to market corrections if investor sentiment changes (Source: Yahoo Finance).

To further highlight the concentrated growth, if we were to remove the performance of the “magnificent seven” from the S&P 500 index, the return becomes relatively flat, with only a -0.8% total return (Source: Yahoo Finance). This reveals that the growth in the index is disproportionately reliant on these magnificent seven while other components struggle to contribute significantly.

Embracing Diversification

As we counsel our clients on protecting their retirement accounts, we emphasize the importance of diversified portfolios and not overweighting into the magnificent seven. Risk mitigation involves careful consideration of various factors, such as individual time horizons, liquidity needs, and risk tolerances. Diversification can help reduce exposure to the uncertainties of emerging technologies, including AI, while still allowing for potential growth opportunities (Source: Investopedia).

person dealing with financial challenges

Economic Challenges Ahead

Looking at the broader economic landscape, we are cautious about the possibility of a recession. Despite the Federal Reserve’s efforts to raise interest rates and implement quantitative tightening, challenges persist. While the Fed’s actions have controlled inflation to some extent, meeting the 2% target remains a challenge (Source: Federal Reserve). Additionally, geopolitical instability on a global scale and higher inflation in foreign markets contribute to the uncertainty surrounding economic recovery.

While a soft landing remains a possibility, historical trends reveal the difficulty of raising rates without triggering a recession. Therefore, we advocate for prudent investment decisions and urge our clients to consult with us, their fiduciary financial planners, to ensure their portfolios and financial plans align with their long-term goals.

The Path Forward

It is essential to note that past performance of the index does not guarantee future results. As we navigate these uncertain economic waters, we must rely on informed decision-making based on facts and personalized financial planning. Our commitment to comprehensive financial strategies ensures that our clients can face potential economic challenges with resilience and confidence, safeguarding their financial future.

Seth J. Edgil and David Guttery offer products and services using the following business names: Keystone Financial Group– insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | Ameritas Advisory Services, LLC (AAS) – investment advisory services. AIC and AAS are not affiliated with Keystone Financial Group. Information is gathered from sources believed to be reliable; however, their accuracy cannot be guaranteed. Data provided is for informational purposes only and should not be construed as a recommendation to purchase or sell any investment product.

Video Content

Within our current video, we continue to observe what could be evidence of changing economic seasons. From a tactical perspective, we believe there is compelling evidence that persuades us to continue adjusting exposure at this time.

Bond yields may have peaked in October of 2023, and the Federal Reserve has taken no action in six of the last seven meetings. We believe that this is due, in part, to the observation that inflation, as measured by the CPI, as well as the PCE deflator, continues to reflect improvement, especially at the core level.

According to the Labor Department, personal income has outpaced inflation for seven consecutive months. The capacity to consume has improved over the last 18 months, and we believe this is supporting trends that have been gaining traction since December of last year. We may be returning to normal patterns of consumption, and because this represents 70% of GDP, it is tactically important to observe the improving financial metrics of the average household.

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