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April 2024 Chart Pack Summary: US Economy Stays ‘Exceptional’; We Remain Constructive on Stocks

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

Tactical Rules Remain Neutral

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

Have you ever heard of the Magnificent 7?

No, we’re not referring to the classic western starting Yul Brynner and Steve McQueen.  We’re referring to the seven companies most responsible for the stock market’s rise over the past year.  In fact, they have played such an oversized role that it’s time to start thinking about what might happen if they were to…stop.

Many of our clients have been asking us about the Magnificent 7 lately.  (The term is not an official one, of course.  An investment analyst coined it last year and it quickly caught on.)  So, in this message, we’re going to answer:

Six Important Questions About the Magnificent 7

Let’s start with:

1. What exactly are the Magnificent 7 and why do they matter?

While we rarely mention specific companies when discussing the markets, we’re going to name them here.  The Magnificent 7 are: Amazon, Alphabet (aka Google), Apple, Meta (aka Facebook), Microsoft, NVIDIA, and Tesla.  Collectively, these companies have a greater market capitalization than all the combined companies in nearly every country in the world.¹  In fact:

• In 2023, their market capitalization represented a staggering 29% of the entire S&P 500.²
• The stock prices of these companies rose by an average of 111% last year.²
• In January 2024 alone, just five of these seven stocks were responsible for 98% of the S&P 500’s gains for the month.³

When we zoom out and look at the stock market, we tend to see it as a single squiggly line.  Sometime the line goes up.  Sometimes it goes down.  Sometimes, it zig-zags.  But this isn’t really an accurate way to think of stocks.  At any given time, some stocks will be moving up, and some will be moving down.  If more stocks are moving in one direction than another – especially if they are weighted more heavily, which we’ll get into in a moment – then that’s what drives the overall direction of the market.

It’s uncommon, however, for such a small handful of stocks to affect the squiggly line so thoroughly.  And that’s why the Magnificent 7 matters.

2. Why are the Magnificent 7 having such an oversized impact?

Okay, bear with us here, because we’re about to get a little technical.

The S&P 500 is what’s known as a capitalization-weighted index.  That means each of the 500 companies are weighted according to their market capitalization.  This is a company’s share price multiplied by the number of shares available to buy or sell.  As you know, some companies are simply bigger or do more business than others.  Typically, this means they have more outstanding shares.  A high number of shares plus a high share price leads to a higher market capitalization.  This in turn means they have more weight within the S&P 500.  The result?  The price movement of these companies has a greater impact than that of smaller companies.

In an unweighted index, every company has the same impact, no matter its price or how many shares are available.  The price of the index is determined by simply adding up every company’s stock price, then dividing by the total number of companies in the index.  But in a weighted index, when some companies perform at a much higher or lower level than the average, they can push the entire index way up…or drag it way down.

Here’s another way to think of it.  In 2023, the S&P 500 rose by 24%.  If you gave each company in the index an equal weight, that number would drop to 12%.²  And if you took the Magnificent 7 out of the index entirely, that number would be only 8%.²

That’s how much weighting can matter.

3. Okay, so why have the Magnificent 7 risen so much?

It helps that six of the seven are household names that just about everyone has heard of.  They provide products and services that many people use every single day.  (Cell phones, computers, the chips needed to power both, cars, delivery, etc.)

But the main reason for their current rise can be summed up in two words: artificial intelligence.

The last two years have brought some stunning advances to the field of AI.  There are now a multitude of AI-driven products available. Many are designed to help companies boost productivity and increase efficiency.  These advances have many investors salivating at the possibility that AI will help companies produce more than ever before…and in doing so, return more value to their shareholders.  Many experts believe that AI could change the world similar to how the internet did.

Each of the Magnificent 7 are either heavily leveraging AI or are actually helping to advance it.  Each is an already-successful company.  Each has stellar brand recognition.  And each is at the forefront of a potentially revolutionary new field.

4. Does this mean we should put everything into these 7 stocks?

In a word?  No.  In two words?  Absolutely not.

Let’s review some recent history.  Before the Magnificent 7, the hot buzzword on Wall Street was “FAANG” stocks.  (This was an acronym for Facebook, Amazon, Apple, Netflix, and Google.)  In the late 2010s, these companies also represented a huge portion of the S&P 500.  But over time, things changed.  Facebook became Meta.  Google became Alphabet.  And companies like Tesla and NVIDIA grew to have a far greater market capitalization than Netflix.

Then, too, even these tech giants haven’t always been winners.  For example, remember 2022?  The S&P 500 lost 19.4% that year.⁴  The culprit?  Tech.  Many of the same tech companies that drove the markets in ’23 are what dragged the markets in ’22.  (This includes the Magnificent 7.)  Nobody, no matter how intelligent or experienced, has a crystal ball.  Nobody knows how long the Magnificent 7 will stay magnificent…or which companies will eventually, inevitably, replace them.

This is why we are such believers in the concept of diversification.  Because we don’t know, we don’t try to guess.  Instead, we make sure we are positioned to take advantage of any sector, at any time, instead of taking the proverbial “eggs in one basket” approach.

5. What does this all mean for the future?

Again, there’s no way to know for certain…but there are a few possibilities.  One is that the market rally continues because the breadth of the rally increases.  Rather than relying on just a few companies to propel it forward, the market instead enjoys a broader front, where more companies are rising in value at the same time.  This indicates a healthier market.  Earlier in the year, market breadth was narrowing – a bad sign.  In recent weeks, however, that trend has started to reverse.⁵  More shares have been rising compared to those falling.

Another scenario is that things continue as they have.  That’s probably not sustainable, however.  Either more companies will catch up, or at least some of the Magnificent 7 will come back to earth.

There’s a third scenario we must always be on the lookout for: That the hype around AI represents a bubble.  Remember the dot-com bust around the turn of the century?  The rise of the internet created so much excitement that many net-based companies exploded in value…only to implode when it became clear their value was based more on hype than anything real.  Right now, AI is an exciting new frontier.  Only time will tell, however, whether that frontier is a real horizon or just a mirage.

6. So why is it important to know about all this?

For two reasons.  First, it reminds us that the “squiggly line” we see representing the stock market doesn’t always tell the full story.  In this case, the line for 2023 and into 2024 looks impressive.  But when you zoom in, you see the breadth of that line is remarkably skinny.  While the stock market has undoubtedly done well, the majority of the market isn’t quite as impressive as it seems on the surface.

Second, it reminds us not to get caught up in the hype…or in headlines.  The Magnificent 7 represent a group of exciting companies propelling the markets.  That’s the story today.  A story we definitely want to participate in.  But what will the story be tomorrow?  That is something we must never forget to consider…and always be prepared to face.

In The Magnificent 7 film, a group of gunfighters are hired to protect a small town from bandits.  By the end of the movie, some of the group survived; others didn’t.  As the survivors prepare to leave, the town leader tells them: “You’re like the wind…blowing over the land and passing on.”

In our experience, individual stocks are also like the wind.  They blow over the land…and then they pass on.  Our job is to be the land itself.  Our job is to remain.  And that is what we will always strive to help you do.

Please let us know if you have any questions – or if there is ever anything we can do for you!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

¹ “Magnificent 7 profits now exceed almost every country in the world,” CNBC, www.cnbc.com/2024/02/19/magnificent-7-profits-now-exceed-almost-every-country-in-the-world-should-we-be-worried.html

² “Magnificent 7 Lead Domestic Large Cap Outperformance,” Forbes, www.forbes.com/sites/greatspeculations/2024/01/22/2023-in-review/?sh=6d37f2fd690b

³ “Will the Magnificent 7 Keep Carrying the Market?” Morningstar, www.morningstar.com/markets/magnificent-seven-earnings-whats-ahead-biggest-players-stock-market

⁴ “S&P 500 finishes 2022 down nearly 20%,” CNBC, https://www.cnbc.com/2022/12/29/stock-market-futures-open-to-close-news.html

⁵ “Fear & Greed Index – Stock Price Breadth,” CNN Business, www.cnn.com/markets/fear-and-greed

Q4 Earnings Roundup: On the Whole, Wholly Good

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

For some people, St. Patrick’s Day is a celebration of their Irish heritage.  For others, it is primarily a religious day.  (It’s named, after all, for a legendary religious figure.)  More recently, it has become a celebration of Irish culture in general.  But many people don’t know that St. Patrick’s Day also plays an important role in American history.  Specifically, with the American Revolution.

***

There have been few winters more brutal than that of 1779-1780.  For the American soldiers of the Continental Army, conditions were even worse than they had been two years earlier at Valley Forge.  Most of the army was camped near Morristown, New Jersey, buried under nearly six feet of snow.  The soldiers had been struck by twenty-eight different snowstorms since the beginning of winter.  There was a constant shortage of food and supplies.  George Washington wrote that soldiers often had to go “five or six days together without bread, at other times as many days without meat, and once or twice, two or three days without either.”¹  Smallpox was a constant threat.  Few soldiers had adequate clothes.  Most had not been paid in months.

Of the 8,000 troops in the camp, Washington estimated that as many as one-third were unfit for duty.

Despite these appalling conditions, duty never stopped.  There was still a war to be fought.  The men were so busy, they hadn’t even had the time to celebrate Christmas.

Washington knew something had to be done.  The situation was so bad, and morale so low, that the entire army seemed on the verge of deserting.  So, as winter went on, with no hope for an early spring, he began to look at a very specific date on his calendar:

March 17.

It was a well-chosen date.  The day already had a tradition of being the anniversary of St. Patrick’s death.  And the American army was an increasingly Irish-American army.  Over 200,000 Irish people had emigrated to the colonies in the 18^th century, the largest of any immigrant group.²  Many came from a long tradition of opposing British rule.  As the Revolutionary War dragged on, more and more began volunteering for the Continental Army.  Washington’s own aide was from Ireland, as were several of his subordinates.  Of the rank-and-file, approximately 25% were either Irish-born or of Irish descent.³

Then, early in the year, news came through the camp of a possible armed revolt in Ireland.  To the Americans, the idea of other kindred spirits fighting for their own liberty against the British was an inspiring one.

This convinced Washington the time was ripe to give his soldiers something they desperately needed: A holiday.  And so, he selected March 17, 1780.  St. Patrick’s Day.

“The general congratulates the army on the very interesting proceedings of Ireland and the inhabitants of that country which have been lately communicated; not only as they appear calculated to remove those heavy and tyrannical oppressions on their trade but to restore to a brave and generous people their ancient rights and freedom and by their operations to promote the cause of America.  Desirous of impressing upon the minds of the army, transactions so important in their nature, the general directs that all fatigue and working parties cease for tomorrow the seventeenth, a day held in particular regard by the people of the nation.” ² – George Washington, Proclamation, March 16, 1780

This was actually not the first time Washington turned to Ireland for inspiration.  Four years before, he had watched British troops evacuate Boston after an eleven-month siege.  It was his first major victory of the war.  That day, Washington ordered that anyone wishing to re-enter the city must provide a password and countersign.  The password: Boston.

The countersign?  St. Patrick. 

Back in 1780, the holiday was exactly what the Continental Army needed.  One local newspaper reported that day was “…ushered in with music and hoisting of colors, exhibiting the 13 stripes, the favorite Harp, and an inscription declaring in capitals, THE INDEPENDENCE OF IRELAND.”⁴  There were parties of music and dancing throughout the camp.  A Pennsylvania brigade was able to procure an entire barrel of rum.  One Irish relief organization was so grateful to Washington that they named him an honorary member of their society.

Of course, the Revolutionary War still had several years left to go.  But that one St. Patrick’s Day celebration helped the soldiers who secured our independence to rediscover their morale, spirit, and hope for the future.  It was not only a chance for them to celebrate where they had come from.  It was a chance to rededicate themselves to where they were going.

Today, St. Patrick’s Day is a celebration of Irish heritage and culture.  But it’s also a chance for us as a country to do what our ancestors did: Raise our spirits, lift up morale, celebrate our past…and look forward to our future.  This year, may we all do just that!  So, on behalf of everyone at Hudock Capital Group, we wish you a very happy St. Patrick’s Day!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

¹ “Washington’s Encampment at Morristown,” Battlefields.org, https://www.battlefields.org/learn/articles/washingtons-encampment-morristown-new-jersey-and-hard-winter-1779-1780

² “Washington’s St. Patrick’s Day Proclamation of 1780,” Mount Vernon, https://www.mountvernon.org/george-washington/religion/a-brave-and-generous-people/

³ “George Washington’s Revolutionary St. Patrick’s Day,” History, https://www.history.com/news/george-washingtons-revolutionary-st-patricks-day

⁴ “St. Patrick’s Day 1780 in Jockey Hollow,” National Park Service, https://www.nps.gov/articles/000/stpatricksday1780.htm

The Great Cash Mismatch

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

American ‘Economic’ Exceptionalism

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

Happy Valentine’s Day!

For many people, Valentine’s is the most romantic day of the year.  But not everybody feels that way.  Some people are single.  Some are divorced.  Some are widowed.  Others don’t think the idea of spending money on flowers, chocolates, and fancy dinners is romantic at all and may resent the feeling that society “expects” them to do it.

In truth, though, the day is about far more than romance.  It’s about showing others they are loved and appreciated.  Recently, we came across several stories of people who are doing just that: Using Valentine’s Day to spread love in their communities and show appreciation to those who need it most.  In honor of the holiday, we thought we’d share three of those stories with you.

At Rush University Medical Center in Chicago, many of the patients are veterans.  Most of these wounded warriors are there for the long term.  Some are injured in body, mind, and heart.  Others are elderly and frail, their bodies finally on the verge of giving up the long fight.

All have dedicated their lives to serving their country.

So, every Valentine’s Day, a group of local teenagers take the time to show these veterans how much their service and sacrifice mean to the community.  Working with the residents of a nearby senior living community, the teens craft Valentine’s Day gifts by hand.  First, they paint dozens of bowls, then fill them with paper hearts and cranes.  Each is carefully shaped, cut, and folded with as much care and love as possible.

The students were not the first to do this.  The tradition started eight years ago with former students and has continued ever since.  And they know they will not be the last.

According to the hospital staff, “It lets [the veterans] know we love them, and we appreciate them.  When they get these [Valentines], it really warms their heart.”¹

And as one gift giver put it: “By showing love for other people, we can be their Valentine in a way.”¹

***

When it comes to showing love, nothing on Earth shows it better than a dog.  That’s why, in the Philippines, some people choose to spend Valentine’s Day giving love back.

Every Valentine’s Day in Manila, an animal shelter charges guests about $10 to spend half an hour with a rescue dog.  Many of the dogs came from abusive households or experienced trauma.  The fee goes to running the shelter, which cares for over 240 dogs and cats.  The guests can choose one or more dogs to walk and play with, and many will choose to adopt their new furry friend.  But all the dogs benefit, because it helps them relax, improve their social skills…and yes, feel more loved.

Says one of the caretakers: “A lot of animals in the shelter can give all the love that they can give, but they aren’t given a chance.”²  But now, many dogs will get that chance.

Thirty minutes with a dog.  Who could ask for a better date on Valentine’s Day?

***

As you know, few gifts are as romantic as flowers – making Valentine’s like Christmas for the floral industry.  In fact, 250 million flowers are sold around the world every Valentine’s Day!

For some people, though, Valentine’s Day doesn’t trigger feelings of romance, but of loneliness.  This is especially true for those who have lost their spouse or partner.  Back in 2021, a florist in North Carolina decided it was time those people felt loved around the holiday, too.

It all began when the florist, Ashley, delivered a bouquet to her son’s preschool teacher as a gift.  It meant so much to the teacher that Ashley started thinking about others who might enjoy a similar gift.  With the help of some volunteers, Ashley decided to deliver free flowers to widows in her community.  Using Instagram to get the word out, Ashley built a list of 125 people.

The next year, that number increased to 800.

Since then, Ashley has raised $50,000 and recruited over 1000 volunteers to help make Valentine’s Day special to those who have lost their spouse or partner.  The initiative has become so popular that she no longer does regular business on Valentine’s Day.  Instead, she spends that time knocking on doors and delivering flowers to those who least expect them…and most appreciate them.

“It’s a total surprise, and [at first] there is a lot of confusion,” Ashley says.  “But on a day that may be sad, you open your door, and there’s a young person there with a bouquet and gifts saying, ‘We just want you to know you’re loved today and every day.’  We flipped the script and turned it into a holiday that is not just for people who are married or have a partner to celebrate with.  When we see the smiles on people’s faces, it’s encouraging to know there are a lot of good people in this world, and it takes one movement to create a ripple effect.”³

To us, these stories prove that Valentine’s Day isn’t just for romance, as fun as that can be.  It’s a day for spreading love throughout our community.  A day for letting those around us know they are appreciated, valued, and seen.  And that, to us, makes it a special day indeed.  So, on behalf of everyone here at Hudock Capital Group, we want you to know how much we value and appreciate you.  Have a wonderful Valentine’s Day!

Sincerely,

Barbara B. Hudock CIMA®, CPM®
Chief Executive Officer
Founding Partner

Michael J. Hudock, Jr., CPM®
President and Founding Partner
Wealth Consultant

1 “For Valentine’s Day, Chicago teens, seniors spread love with veterans,” CBS News, www.cbsnews.com/chicago/news/valentines-chicago-veterans/

2 “Animal lovers book Valentine’s with shelter dogs,” Reuters, www.reuters.com/lifestyle/philippines-animal-lovers-book-valentines-dates-with-shelter-dogs-2023-02-14/

3 “Charlotte florist gives flowers to widows on Valentine’s,” CBS News, www.cbsnews.com/news/valentines-day-flowers-charlotte-florist-widow/?intcid=CNM-00-10abd1h

Our ‘Three Tactical Rules’ Collectively Flashing Yellow

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.

All-Time Highs: Nothing to Fear

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Walking the Talk

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Q4 Recap: Just like Q3, in Reverse

Written by RiverFront Investment Group.  Reprinted with permission from RiverFront Investment Group.  Redistribution is prohibited.