Magnificent Seven Stocks vs. Precious Metals
January 14, 2024
Some might think of one of the greatest Western films ever produced, starring Yul Brynner, Steve McQueen, Charles Bronson, and James Coburn, among others. But today, when we mention “Magnificent Seven,” we are talking about Microsoft, Amazon, Nvidia, Meta, Apple, Alphabet, and Tesla stocks.
These seven stocks were responsible for most of the gains in the S&P 500 Index in 2023. Of the 24% gain seen in 2023, 3/4 came from the “Magnificent Seven.” The other 493 stocks in the index collectively gained only 6%, while the Magnificent Seven collectively gained 111%. But these things happen in cycles, and the Magnificent Seven experienced double-digit losses in 2022. In fact, the gains of 2023 merely helped recover the losses from 2022 and restore the stocks to 2021-level highs. In other words, they are volatile. For growth potential with lower volatility, consider gold.
Magnificent Past – Questionable Future
In order to understand where the Magnificent Seven might be headed in 2024, we first need to understand why they outperformed in 2023. All except for Tesla were deemed to be immune from the higher interest rates that have caused other stocks to struggle. The Magnificent Seven print cash, with few loans on the books coming due to be refinanced.
Other companies with higher debt loads are facing a restrictive refinancing environment with higher interest rates and stricter lending standards, which have weighed heavily on stock prices. Today, there is talk of lower interest rates returning in 2024, which often accompany looser lending standards. Investment managers such as Jeffrey Gundlach of DoubleLine Capital believe we will see a rotation out of the Magnificent Seven stocks into other market sectors that currently offer better bargains.
Last week, the Magnificent Seven stocks collectively lost $400 billion in market value, erasing nearly all of December’s gains. Ironically, many who purchased and rode Magnificent Seven stocks higher are the ones now selling to rotate into other sectors. On a positive note, this might bode well for the broader market, as it gives the other 493 stocks the opportunity to experience greater gains than those experienced in 2023. Eventually, the Magnificent Seven will likely rise again – after taking a breather. One thing that has impacted all seven stocks is the development of AI, or “artificial intelligence.” Over time, the efficiencies of AI will impact corporations in every industry and sector. Those gains are already baked into Magnificent Seven stock prices, but are yet to impact stocks in other sectors.
Value vs. Growth
We are entering a phase where “value” stocks may outperform “growth” stocks such as the Magnificent Seven.
Value stocks often have pricing power and provide goods and services that people use every day, no matter the cost.
Inflation continues to raise prices above the target rate of 2%, and companies that provide things like groceries, healthcare, or utilities are in a better position to raise prices to keep up with inflation. No matter what, people need to eat, receive medical treatment, and use energy.
People may cut back on discretionary items when times get tough, but not on necessities. Value stocks allow investors to participate with the upward price movements caused by inflation.
But perhaps a less risky way to benefit from the effects of inflation is by owning gold. We are currently, and for the foreseeable future, facing above-average inflation with the potential for recession. In these types of conditions, value stocks can outperform growth stocks by losing less. Instead of losing 20%, value stocks might lose only 12%. A better result would be to maintain the purchasing power of your investments, which gold is more likely to do in this environment.
Conditions Favoring Gold
Not only are we facing stagflationary economic conditions, but we are also dealing with record national budget deficits and an expanding war in the Middle East that the US is now directly involved in. Overnight, the United States and the United Kingdom struck 12 targets in Yemen with over 100 munitions, such as cruise missiles and other missiles launched from US aircraft. This is in response to Yemeni attacks on US military and commercial vessels in the region.
Yemen has vowed to retaliate for these attacks, and there are unconfirmed reports of US aircraft downed by Yemeni fire. Oil, gold, and silver are higher on the news, while all major stock indexes are currently lower.
Much of the shipping transited through the Red Sea has been diverted around the Horn of Africa, adding 10-14 days and increased fuel and insurance costs for each shipment. Some vendors have reported a 250% increase in shipping costs due to the conflict, which adds to further price inflation and less availability of goods. If the conflict continues, shortages and higher prices will continue to mount, which will put further pressure on stock prices.
At the same time, gold and oil prices would be the likely beneficiaries. Since it is more difficult to purchase and store oil, gold is the obvious choice for prudent investors worldwide. While not happy about war, deficits, shortages, and inflation, owning gold can at least help mitigate the risks to our financial future in times like these.
Magnificent Seven vs Magnificent Metal
The Magnificent Seven have had a great run over the last ten years, but nothing rises indefinitely.
Signs indicate that the tide is shifting, and gold appears to be in the beginning stages of a bull market of its own. Gold has outperformed the S&P 500 Index in the 21st Century and was among the top-performing asset classes for 2023. While the Magnificent Seven outpaced gold in 2023, gold performed twice as well as the other 493 stocks in the index. For long-term performance, gold has no equal. Stocks come and go, as do the stocks that make up the major market indexes. Gold remains.
Besides consistent, market-beating performance for the last 24 years, gold also has times when it rallies beyond its long-term average. I believe we are entering one of those times when you might want to trade the “Magnificent Seven” for gold – the “Magnificent Metal.”