To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing up 0.6%; the U.S. Dow Jones Index up 0.8%; and the U.S. S&P 500 down 0.8%.
I heard something this week which resonated with me, and which I thought I’d share with clients because it’s relevant. Josh Brown, a frequent guest on CNBC said the following:
“Diversification is something you always need to apologize for; it’s also something you never need to apologize for.”
The oxymoronic nature of the observation aside, let me explain what Mr. Brown was driving at with references to the actual equity portfolios I am managing for discretionary clients. For much of the past 18 months, the majority of stock market gains have been generated by members of the so-called “Magnificent 7”. The Magnificent 7 consists of the following companies: Alphabet (aka Google), Amazon, Apple, Meta (aka Facebook), Microsoft, Nvidia, and Tesla. Four of these companies are held by discretionary clients: Alphabet, Amazon, Apple and Microsoft. And, like the broader markets, a disproportionate share of client returns the past year and a half have been generated by exposure to these four stocks.
Perhaps to little surprise, the noted outperformance has led to client questions about the inclusion of laggards such as: Brookfield Infrastructure Partners, Canadian Tire, Union Pacific, Johnson and Johnson, U.S. Bancorp and United Healthcare. Clients often wonder “why don’t we own more of the Magnificent Seven and less of the other names I just listed?” In other words, I’ve been “apologizing” for the inclusion of these names.
Well, client exposure to the Magnificent Seven is held for a reason – because I respect the leadership of these companies. BUT, trees don’t grow to the sky, and there are other companies that offer very compelling return prospects that deserve inclusion in well-constructed portfolios. As such, it’s interesting to note the following:
- Through mid-morning, average month-to-date returns of the Magnificent 7? ………… -2.7%
- Through mid-morning, the average month-to date returns of the 6 stocks I’ve been apologizing for? …………. +10.9%
Now, its true that the Magnificent 7 are still vastly outperforming over the past 18 months, but it’s times like the present that highlight the benefits of diversity. It’s nice not having to apologize when the inevitable happens and markets gyrate.
Oh, and I’ll add in closing that the Bank of Canada did the expected this week, and lowered rates by 0.25% for the second consecutive meeting. The U.S. Federal Reserve is expected to follow suit, possibly as soon as next week, although more likely in September.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
Visit Our Website: www.nickscholte.ca
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