The performance of global stock markets this year has been led by a handful of stocks. With share prices at elevated levels and the economic outlook deteriorating, investors should focus on individual corporate fundamentals.
Global equities appear to have advanced at a healthy pace this year, with the MSCI World Index rising by around 8.3% in USD terms over the year to the end of October. However, the headline figures mask the concentration of these gains among a relatively small number of stocks. In the US, for example, the S&P 500 had gained around 19% by mid-November. Yet the Magnificent Seven of Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla are responsible for much of this rise. While the Magnificent Seven have gained 71%, the remaining 493 stocks in the S&P 500 have added just 6%.1
We believe the narrow nature of these gains doesn’t support a soft-landing narrative, rather high levels of liquidity have supported this handful of stocks. However, the liquidity environment is turning, and leading indicators continue to point to a mild recession. Monetary policy is the tightest it has been in over 20 years and the Federal Reserve has indicated it intends to continue bearing down on inflation until the central bank is absolutely sure it has been vanquished.
Potential volatility as the US heads back to the 1970s
At the same time, the Biden administration continues the approach of populist spending, with the budget deficit surging 23% wider to $1.7 trillion in the 2023 fiscal year ending on 1st October – exceeding all pre-COVID shortfalls. Current tax and spending projections suggest the budget gap will remain wide. Both the main US parties are committed to protecting leading-edge technology and onshoring supply chains as well as addressing climate change, and spending pressure on healthcare and social programs will only intensify as the population ages.
These contradictory economic policies, where a tight monetary stance is competing against a loose fiscal stance, are likely to create further volatility in US economic growth and inflation. That too will leave investors guessing about the direction of monetary policy – in particular, how long interest rates will remain at their currently elevated levels, and how fast they’ll fall if economic activity declines sharply. Concern about how this large fiscal deficit will be funded provides another potential threat to financial markets.
Current valuations highlight the need for caution
This backdrop could promote the volatility seen in financial markets in the 1970s when policy makers also flip-flopped from a stance focused on taming inflation to one seeking to spur growth. Back then, however, stocks were priced at much lower multiples than is the case today. That suggests today’s investors would do well to focus on individual corporate fundamentals and be disciplined about paying the right price for a company’s business resilience and growth profile. The potential for volatility is certainly high – and as every investor knows, volatility is kryptonite to markets.
Read our Q3 Market Update to learn more about Antipodes global market strategy.
1 https://finance.yahoo.com/news/one-chart-shows-how-the-magnificent-7-have-dominated-the-stock-market-in-2023-203250125.html
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