It's a Mad, Mad, Mad World

Markets continue to move onward and upward despite the heavy burdens of uncertainty in financial markets due to the Russian/Ukraine war, Israel vs. Middle East neighbors, and tariff uncertainty. Magnificent Seven stocks, which include Microsoft, Nvidia, Apple, Amazon, Meta, Alphabet and Tesla represent an astounding 35% of the S&P 500 – are largely responsible for gains in the index over the last 3 years. 

This may leave many investors believing “Diversification?, I don’t need no stinking diversification”.

Their evidence: since 2010 the U.S. market has outperformed international markets by an average compounded rate of 8.14% annually and even more in emerging markets. Domestically, publicly listed small and value stocks have not fared much better compared to the S&P 500 behemoth over the last 15 years. Consequently, investors with no experience or expertise who plopped their money in the S&P 500 have done better than the professionally managed (diversified) portfolios during this time to the chagrin and embarrassment of many managers.

However, the tide may be changing…

This year the market has been led by International and Emerging Market stocks – with returns over 20% YTD while the S&P 500 has returned just under 10%.  In fact, YTD the Magnificent 7 performance has been almost identical to the return of the broader index – becoming much narrower (almost all positive returns the result of Nvidia, Microsoft and Meta). 

Those who have been clients for a while know that I’m no predictor of markets over the short term – but long term I expect a reversion to the mean – meaning the eventual outperformance of almost everything relative to the Magnificent 7. The laws of gravity and finance can only be suspended for so long…