We're seeing some recent under-performance of the vaunted Mag 7 stocks, while other sectors of the market are beginning to move higher and participate in the recent rally.
The inspiration for this week's musings is the 1983 movie, "Trading Places" where Eddie Murphy's character gets pulled into the world of commodities trading. This was Eddie Murphy's 2nd movie, right on the heels of "48 Hrs." released in 1982. Here's some trivia about the film:
Considering the relative low budget of this film at $15 million, it had a strong box office result - earning more than $90 million worldwide. While the cast was flooded with top A-listers, there were also a lot of interesting cameos:
John Landis (who directed the movie)
Jim Belushi
Al Franken
Bo Diddley
Frank Oz
James Eckhouse
This movie was filmed right after "Twilight Zone: The Movie." This was controversial because three people, including two children, had died in a stunt during filming of the "Twilight Zone" while John Landis was directing the movie. Landis would later go on trial for manslaughter for the incident, only to be acquitted. Landis and Murphy grew close after "Trading Places," as Landis would go on to director other Murphy films such as "Beverly Hills Cop III" and "Coming To America." However, Landis was upset at Murphy and resented him for not appearing as a character witness at Landis' trial for the "Twilight Zone" incident.
Paramount had to be sold on the idea of using Jamie Lee Curtis in the film because she had only done horror films and wasn't know for comedy. However, Curtis pulled it off. She even switched during the filming of the train scene when she is supposed to speak with an Australian accent. She couldn't do the accent, so they changed the role to a Swedish hiker, which was an accent she could pull off. Incidentally, one of Penelope's friends in the film (Muffy) is played by Curtis' sister, Kelly Curtis.
Murphy later admitted that he had to strictly follow the script when filming the trading scenes because he no idea what was going on. He found commodities training incredibly confusing.
Here's what we've seen so far this week...
Turn Those Machines Back On! Last week we brought attention to the fact that a consolidation could be taking place in the markets. There seems to be even more evidence of that this week. There's a great scene at the end of "Trading Places" when the Duke brothers have been ruined by their own greed.
At the realization that they have lost millions and that the commodities market is closed trading for the day, Mortimer Duke yells, "Turn those machines back on!" Investors heavy in Mat 7 stocks might be thinking the same thing right about now. I've updated the chart from last week showing Mag 7 versus the S&P 500 Index and the Equal-Weighted version of the S&P. I've added Mid-cap and Small Cap equities to the list. While Mag7 still has the lead year-to-date, the the last 3 weeks have seen Mid-caps and the Equal-weighted S&P 500 out-perform.
In other words, other sectors and asset classes within equities are beating the Mag 7. In fact, 3 of the the Mag 7 - Apple, Google, & Tesla - are negative both year-to-date and over the past 3 weeks. Diversification at this point is a better strategy for investors and consolidation is a healthy thing for this bull market. It's no wonder that some of the Mag 7 stocks are under-performing as executives at the Mag 7 companies are selling their shares in those stocks at the highest pace since late 2021. That's not to say that those companies are in trouble, but their stock prices are at all-time highs and taking profits is a good strategy. What's encouraging, as I stated earlier, is that other stocks in different sectors are out-performing.
Noted hedge fund manager Ray Dalio has recently performed some analysis on this current equity market and has determined that the market is not all that bubbly. In an article he posted last week, he laid out the criteria he analyzes to determine market bubbles, such as - sentiment, prices, economic conditions, leverage, and investor types. According to his analysis, the 70th percentile is when markets get bubbly and currently, the market is in the 52nd percentile, which is nothing close to 1999 and it's lower than 2007. This view from a hedge fund manager, a group that tends to lean bearish, should give us some confidence that we're not particularly at risk of a bubble bursting, although we are due for a market pullback soon which again, would be a healthy thing.
Looking Good, Billy Ray! One of the classic quotes from "Trading Places" comes at the end of the film when Billy Ray and Louis have fooled the Dukes and presumedly walked away with millions. Louis toasts from his sail boat, "Looking Good, Billy Ray!" To which Billy Ray retorts, "Feeling good, Louis!"
Like Billy Ray, we should be feeling good right now about the economic situation. The Fed certainly is. In Chairman Powell's comments this week before Congress he noted that "ongoing progress toward 2% inflation target not assured." That means, the Fed is still seeing signs of some inflation. If the economy is not growing, there is typically little-to-no inflation. And since the Fed is not signaling a rate cut in the immediate future, it means the economic data supports interest rates where they are. The jobs report that came out this morning beat the expected number (275,000 vs 198,000 expected) and was higher than the previous month. The unemployment rate ticked higher to 3.9%, but if we look at the historical data, the economy averages 5.7% unemployment and "full employment" is considered at or below 5%.
Meanwhile, consumers continue to spend as the Consumer Credit data came in strong (+$19.5 billion) for January after a low December report. Many are pointing to the number as a sign that too many people are leveraging up on credit card debt. However, when we look at population growth over the last several decades, it's easy to see the dollars on credit go up with population increases, as there are more consumers utilizing credit. In addition, the type of consumer utilizing credit and type of usage matters. Only 57% of adults earning less than $25,000 annually own a credit card, while ownership is 98% among adults who earn more than $100,000 annually. In addition, 4 in 10 adults utilize a credit card for online payments including, monthly subscriptions.
The ISM Manufacturing PMI data has been week the past several quarters, which is something the permabears have been pointing to of late. However, the PMI measurement typically lags the New Orders to Inventory Ratio. New orders are out-pacing the amount of inventory, meaning that inventory will have to be increased to meet demand. This should help the PMI data improve with increased production. While we would like to see a pullback in equity markets or a slight correction, it's hard to argue with the general direction of equities. However, given recent concentration in a few stocks, diversification moving forward is likely the better part of valor.
Here's the hilarious scene where Billy Ray learns about commodities...
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