Market Minute – Week of February 12

Welcome to the “Market Minute” series! In this weekly blog post, Dave provides you with all the latest updates on market and economic trends that you need to stay on top of.

Continued Highs

The market indices continued to make new highs last week, despite FOMC chairman Powell’s comments last weekend that made it clear that interest rate cuts are still uncertain. Again the market strength has been on the backs of a handful of large tech companies dubbed the Magnificent Seven (Apple, Meta, Alphabet, Nvidia, Amazon, Microsoft, Tesla). While the Standard and Poor’s 500 Index, tracking the 500 largest US companies, was up 1.4% for the week, the Morningstar US Technology Index posted an eye-popping 3.5% gain.

Diversification

Diversification means always having to say you’re sorry. When the market is strong but the strength is narrow, it is natural for investors to look at their portfolio and wonder why it is not keeping up with some of the headline numbers. A truly diversified portfolio will always underperform in a narrow rally. It is important to remember that concentrated growth comes with concentrated risk. To see this in action, we only need to look back to the collapse in 2022: the Morningstar Tech Index, measuring that part of the market now driving the gains, dropped almost 36% that year between January and mid-October. The broader market, as measured by the S&P 500, still had an ugly time, but was down almost 12% less than the tech index. Over time, a strategy that diversifies across the markets provides better risk-adjusted returns.

Wide Moat Stocks

Morningstar points out that while the focus has been on the Magnificent Seven, there is a broader section of the market that has done well: what they call “Wide Moat Stocks,” which are companies whose businesses do not have much current competition. This includes six of the seven large tech stocks (Tesla is the exception), but adds a broader swath to the market strength and includes some unique names like JP Morgan, Eli Lilly, Broadcom, and Salesforce. Morningstar points out that their broad moat stocks have contributed 72% of the market strength since the lows last September.

Upcoming Week

• Consumer Price Index
• Retail Sales Report