With a looming recession, interest rate hikes, layoffs, and the war in Ukraine, are we really in a bull market? It certainly doesn’t feel like it. The answer is that we are technically in a bull market because the S&P index is up 20% or more from its low. However, only a handful of stocks are up this year and their gains are related to artificial Intelligence (AI). The MAGMA stocks are red hot. What are these stocks? Microsoft (+40%), Apple (+44%), Meta (+140), Google (+38%) and Amazon (+54%). Together, these stocks represent almost 25% of the S&P 500 index. The bull market is largely attributable to these stocks. It’s important to remember that a rising tide does not lift all boats. Less than 25% of the stocks in the S&P 500 have outperformed the index year to date.
We do not construct our models with a concentration on only a few risky stocks, so performance will differ from the S&P 500. For example, Amazon’s performance is actually down 2% over the last three years. In that timeframe, Amazon was down over 50% in order to be up 54% this year and still negative from the stock price three years ago. Investors would prefer more consistent performance from their investments.
The funds we use in our models do have an allocation to the MAGMA stocks along with other companies that make up the world economy. Our objective is to even out the extreme ups and downs of the market with focus on minimizing the down side. A baseball player who avoids the strike outs and consistently gets on base is more successful than an occasional home run hitter. As the economy strengthens and the bull market broadens, a diversified portfolio will smooth out the volatility of the market.