No one is immune to having “one of those days,” or even “one of those months”. Even the greatest baseball players of all time have terrible stretches where they come back to Earth from inhuman streaks of stellar performance. Take Ty Cobb, “The Georgia Peach,” for example, who went 0-for-17 across 5 games in April of 19201. Or even “The Babe” who at one point later in his career in 1934 went hitless for 21 at-bats. Other notable skids include Ted Williams going 0-for-17 in August of 1954 or Barry Bonds* failing to get a hit for 23 at-bats at age 21. So, it should not come as a surprise that all things that can get hot can go very cold without warning and sometimes without reason. Some never recover their former glory such as the case with the legendary Babe Ruth who was mostly used as a pinch hitter following that slump.
This is true for stocks as well. Take Tesla for example. In 2024 Tesla was ranked as the 27th best stock in the S&P 500 according to performance with a 63% return for the year2. This year with a -2% year-to-date performance, it’s ranked 403rd. Or look at Apple: its 30% 2024 performance was good for 113th amongst the index but is now bumping along at a lowly 450th place in 2025. Amazon was ranked 56th for 2024 with a 44% return, but now has faded to 168th. Granted it’s early in the year, and we’re all feeling our way around a new political environment and some increasing inflation expectations, but it’s not too early to say something is going on there as their growth trends appears to be disrupted, at least temporarily. These are 3 stalwarts of “The Magnificent Seven” after all so the issue bears some scrutiny.
Phil Rosen, editor of the Opening Bell Daily, recently wrote that the Stock Market would have been flat for 2 years without the “Big Tech” stocks3. He discusses “The Pareto Principle” or the 80/20 rule, that a small number of variables will drive the majority of outcomes. He gives the example that a handful of authors write all the bestsellers and likewise, in this case, “a handful of tech stocks have been responsible for nearly all of the stock markets’ gains in the past several years”. In 2023 the S&P 500 posted a 24.2% return. The S&P 493, without the Magnificent 7, posted a 4.1% gain. In 2024 the S&P 500 logged a 23.3% return. The S&P 493 only gained 6.3%. When the stock pundits on the networks talk about market leadership – there it is.
So what happens when the leadership starts to flag? Why would it flag? Well, there comes a point for everything you can buy that it gets to be too expensive. In the market we measure that with P/E ratios (price-to-earnings ratios). A typical stock should have a PE between 10 and 30 if it’s fairly valued with the range depending on whether we are talking about value stocks or growth stocks with growth on the higher end. Going back to the stocks listed above, Tesla’s P/E ratio is 108. Apple is 40. Amazon is 47. In short, they are all overvalued and set up for a potential correction. The S&P 500 as a whole historically has a P/E Ratio of around 18. Right now, the S&P 500’s P/E Ratio is 29.54. Mutual fund managers, meanwhile, remain “all-in” as they say in poker. According to Bank of America Global Research, mutual fund cash levels are near the lowest level since they began tracking it at around 0.5%. They’ve been forced to go “all-in” by the bull market results of the last two years. But that leaves the question. If there’s little cash left on the sidelines, who’s left to buy?
We’d be remiss to skip discussing inflation expectations. They are up. The ISM Manufacturing number in December was up 2.2%5. The ISM Services Number was up in December by 6.2%. Many survey respondents pointed to the strong possibility of tariffs under the new Trump regime. While the tariffs could be great for trade deficits and the American people in general, it would likely be an inflationary development. Because of that, the Federal Reserve will likely have a hard time cutting rates as many forecast them to do. The 10-year Treasury Bond continues to rise despite two Federal Reserve interest rate cuts, as it has now climbed to almost 4.67% from a low of around 3.6% in September. In response, our Investment Committee has decided to evenly portion out allocations between bond ETFs that do well in a falling interest-rate environment, and those that do well when rates are going up as there is a great amount of conflicting evidence in the data. If you see trading in your portfolios in the next couple of weeks, know that’s us responding to a changing rate environment to keep your portfolios current.
There are still reasons to be bullish and we’re not writing this letter to scare you out of the market. As we’ve stated before, to beat inflation you have to stay invested in some capacity. But there’s a smart way to do it and that involves not placing all your bets with the big tech stocks. Because even Babe Ruth goes through slumps. Tesla can’t go up in a straight line forever, nor can any member of the Magnificent 7 (see also Ted Williams, Lou Gehrig, Barry Bonds*). Valuation matters. If you ignore it forever, you do so at your own peril. At The Wealth Training Academy we’re staying diversified and our strategies aren’t dependent on the Magnificent 7 to carry you every day. There are plenty of other batters that can get the big hits we need, and we’ve positioned your portfolios to have some of those “other” stocks in your lineup as well. We’re your managers. We place the players on the field that we believe have the greatest chance of success when they’re up to bat for you. Give us a call and we’ll change your lineups as needed to help you win your retirement game.
Sincerely,
The WTA Investment Committee
Sources:
1 https://www.thescore.com/mlb/news/1528252
2@LizAnnSonders – 1/6/25
3 https://www.openingbelldailynews.com/p/stock-market-outlook-investors-magnificent-seven-fed-rate-cut-powell-sp500
4https://www.gurufocus.com/economic_indicators/57/sp-500-pe-ratio
5 https://www.cnbc.com/2025/01/07/services-index-shows-big-jump-in-prices-for-december-as-companies-fear-tariffs.html
*If you’re a baseball fan, you know why Barry Bonds has an asterisk behind his name.
