The magic 7 titles. Uncertain situation dissolves.

Chart of the week

The chart shows the return of the broad market index in the USA, the S&P 500 (gray). In dark blue, only the returns of the 7 stocks are shown: Meta, Amazon, Apple, Microsoft, Google, Tesla and Nvidia. These stocks are also known as the magic stocks. Due to their large weighting in the S&P 500, they have single-handedly pulled the return up by 10%. If you look at the index without these 7 stocks, you would have lost 1% in returns since the beginning of the year.
Why this is important
Such market dominance by so few stocks is very unusual. As the US equity market is weighted 60-70% in most world indices, it also has a big impact on many investors.

Many private and institutional investors are likely to underperform the benchmarks this year. In a diversified portfolio, the magic 7 stocks are usually underweighted, but only if you had them did you have a good return.

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Uncertainty is dissipating
In the market report two weeks ago, we talked about the great uncertainty in 4 areas:

- US parliamentary dispute

- War in Israel

- Real estate crisis in China

- Risk of interest rates rising further in the US as the economy fails to cool down

At the same time, we pointed out that investors are more negative than ever before and that we are therefore approaching good entry points.

Three of the points listed above have eased in recent days.
US parliamentary dispute:

A new Speaker of the House of Representatives was elected and he immediately got to work. He presented Biden with a new proposal for an interim budget that will last until January 14, 2024. The proposal provides for a 1% reduction in the budget.
War in Israel:

Last Friday, the head of Hezbollah gave a public speech. The conclusion: He supports Hamas, but does not actively intervene in the war. Iran is also keeping a low profile. The threats from America seem to be working. There does not appear to be a conflagration.
Danger of interest rates continuing to rise in the USA, as the economy is not cooling down:

Last week, surprisingly positive news from the labor market was published for the stock market. The unemployment rate surprisingly rose from 3.8 % to 3.9 % and the increase in hourly wages of 0.2 % was below expectations of 0.3 %.
of 0.3 %. There was also good news for unit labor costs. An increase of 0.7% had been expected here, but they fell by 0.8%.

This reduces the risk of further rising interest rates enormously. There was also a turnaround on the bond market.

The chart shows how the yield curve in the US has changed following these figures. In red is the curve at the end of October and in blue from last Friday. The yield curve has shifted sharply downwards, i.e. interest rates are falling again.

The chart shows the difference between ten-year interest rates in the USA and two-year interest rates. As short-term interest rates are currently higher than long-term rates, this is referred to as an inverted yield curve. In the past, there has always been a recession when the inverted yield curve has begun to unravel.
This resolution now seems to be happening. In other words, the recession should follow in the next 2-4 months.
Of the four areas of great uncertainty, the clouds have now lifted in three of them. This is a sign for us to start buying again now.

The chart above shows the performance of the US S&P 500 share index and below the performance of private investor sentiment. We have already pointed out in previous market reports that it is a good idea to enter the stock market when so many investors are negative. All those who want to sell have already sold and it only takes a little positive news to attract buyers.

This chart also supports the above statement. It shows the number of days on which more investors bought put options than call options on the S%P 500. Put options are used to hedge against lower prices. Since last week, after a record-long 70 days, the value has turned for the first time.
We do not now believe in a two-year turnaround, but rising prices should accompany us until the end of the year.

Over time, however, investors will wonder how severe the recession will be and new fears will arise. We therefore continue to invest in large, solid, quality companies that have had stable earnings for many years. We avoid small companies (small caps). In a recession, small caps would lose the most.