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We Need to Talk About the “Magnificent 7”...

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Tue, Dec 12, 2023 12:01 PM

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A disaster waiting to happen? I?ll go ahead and start with what is probably the most stunning char

A disaster waiting to happen? [Turn Your Images On] [2023 Was the Year of the Magnificent 7]( [Adam O'Dell, Chief Investment Strategist]( I’ll go ahead and start with what is probably the most stunning chart of 2023. Check out the performance of the “Magnificent Seven” compared to the rest of the S&P 500 Index since the beginning of the year: [Turn Your Images On] [(Click here to view larger image.)]( That’s right … the Mag 7 has done +71%, and the rest of the S&P 500 stocks have managed just 6%! As you can see in the chart to the left, these seven stocks (META, AMZN, AAPL, MSFT, GOOGL, TSLA and NVDA) now account for nearly a third of the index’s total market capitalization. These levels of concentration are unlike anything we’ve seen before — even the late ‘90s dot-com bubble doesn’t compare. And it’s all happening because investors from all over the world keep chasing the same Big Tech higher and higher, to valuations that are now nearly twice the S&P 500’s equal weight average: [Turn Your Images On] [(Click here to view larger image.)]( What do these valuations mean for your portfolio? Let’s find out… --------------------------------------------------------------- [Turn Your Images On]( [AI Predicts No. 1 Stock to Own]( New AI-powered stock rating system — that isolates stocks with the highest probability of producing the biggest gains — just released details on the top-rated stocks... [Details here…]( --------------------------------------------------------------- A Dangerous New Herd Since the beginning of the 21st century, index investing has exploded in popularity. Some investors were eager to ditch their asset managers and mutual funds, so they switched over to so-called passive exchange-traded funds (ETFs). Others preferred the simplicity and perceived safety of buying a whole stock index instead of picking a single ticker. Regardless of their reasons, investors had poured more than $10 trillion into index funds by 2020, and they’ve only become more popular since: [Turn Your Images On] [(Click here to view larger image.)]( ETFs and index funds are designed to be a simple, turnkey way of diversifying a portfolio. The oldest ETF, the SPDR S&P 500 ETF (NYSE: SPY), does exactly what it says on the box. It gives investors direct exposure to the S&P 500 for just $0.09 of every $100 investment. As far as fees are concerned, that’s a steal! And it’s hard to argue with the performance. Since it launched in 1993, SPY has returned investors nearly 950% as of this writing. That’s why I’m not here to argue against SPY. No, really, I have nothing bad to say about broad-based ETFs like SPY, QQQ for the Nasdaq 100 or IWM for the Russell 2000. But due to the sheer scale of index investing today, these funds have a material impact on the market. Because when you buy shares in an ETF like SPY, the fund’s managers then use the proceeds of your investment to buy shares of various S&P 500 stocks. To reflect the index’s performance, that means buying increasingly larger quantities of shares in the Magnificent Seven. This action is automatic. Index fund managers don’t think, they don’t worry about price to earnings (P/E). They just buy the shares they’re obligated to buy. And since 30% of the S&P 500 comes down to the performance of these seven stocks, the index goes up. So investors plow even more money into index funds as a result. There’s even a special index fund for the Magnificent Seven stocks themselves — Roundhill Magnificent Seven ETF (Nasdaq: MAGS). I’ve long advocated [taking a look under the hood when you buy an ETF]( and this ongoing consolidation is yet another great reason to know what you’re buying. --------------------------------------------------------------- [Turn Your Images On]( From our Partners at Banyan Hill Publishing. [The Forever Battery: Making Gas Guzzlers Obsolete]( Only 2% of cars sold in the U.S. today are electric vehicles… but that’s about to change — FAST. A new battery breakthrough is ready to hit the market. It could revolutionize the $2 trillion automotive industry … and could soon make gas guzzlers obsolete. This technology is predicted to cause a 1,500% surge in electric vehicle sales over the next four years. The company pioneering this new battery could be the investment of a lifetime. [Click here for details.]( --------------------------------------------------------------- Price Matters The Magnificent Seven aren’t bad companies. Far from it. They’re actually great companies — market leaders with many competitive advantages. Which is exactly why we’re seeing this level of concentration. But in the words of Howard Marks: “It’s not what you buy, it’s the price that makes the investment.” And if you buy SPY at today’s prices, you’re essentially buying into these seven stocks at an average P/E of 34. That’s just not ideal for me. And it’s something you should keep in mind if you’re investing any new capital in index funds at today’s valuations. Nasdaq is already taking action to address extreme levels of consolidation in its own Nasdaq 100 Index. In July of this year, it reduced the weighting for the same seven stocks from 56% down to 44%. [As I explained at the time]( leadership at the Nasdaq exchange became concerned that its group of 100 stocks looked like a list of seven … plus 93 laggards. This rebalance created something of a “soft ceiling” for the biggest of Big Tech. If the stocks rise too quickly in relative value compared to the smaller-cap names in the index, the Nasdaq will rein them in. What this says to me, most essentially, is that the arbiters of one of the most widely invested index funds in the world want to give smaller companies a chance to catch up. That’s significant. It’s a signal to us as investors to “think small” and find quality investments that won’t be subject to institutional-level downsizing. Next week, I’ll show you exactly how to do that — and how to find your new favorite small-cap investment in 10 minutes or less… To good profits, [Adam O'Dell signature] Adam O'Dell Chief Investment Strategist, Money & Markets --------------------------------------------------------------- Check Out More From Stock Power Daily: - [SOLAR VS. WIND IN 2024’S RACE FOR RENEWABLES]( - [BIG TECH, BIG LAYOFFS … BIG OPPORTUNITY?]( - [TRACK THIS CHILLING ECONOMIC TREND IN 2024]( Privacy Policy The Money & Markets, P.O. Box 8378, Delray Beach, FL 33482. To ensure that you receive future issues of Money & Markets, please add info@mb.moneyandmarkets.com to your address book or [whitelist]( within your spam settings. For customer service questions or issues, please contact us for assistance. The mailbox associated with this email address is not monitored, so please do not reply. Your feedback is very important to us so if you would like to contact us with a question or comment, please click here: [( Legal Notice: This work is based on what we've learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It's your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments carry large potential rewards but also large potential risk. Don't trade in these markets with money you can't afford to lose. Money & Markets permits editors of a publication to recommend a security to subscribers that they own themselves. However, in no circumstance may an editor sell a security before our subscribers have a fair opportunity to exit. Any exit after a buy recommendation is made and prior to issuing a sell notification is forbidden. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. (c) 2023 Money & Markets, LLC. All Rights Reserved. Protected by copyright laws of the United States and treaties. This Newsletter may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Money & Markets. P.O. Box 8378, Delray Beach, FL 33482. (TEL: 800-684-8471) Remove your email from this list: [Click here to Unsubscribe](

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