2023 Magnificent 7 Vs 1960's Nifty Fifty ?

AI Bubble: History Repeats?

We’ve been thinking about bubbles, given the recent AI hype, and we notice similar trends towards how the market’s rebound this year is concentrated to a select few. Based on the graph below, the NASDAQ’s rebound is suggesting things are “normal” — but are they?

Given the rebound is above +20% we are technically in another bull market. Yet that shouldn’t be a signal of rosier things ahead – looking back there were no less than four —and almost five — so-called ‘‘new bull markets’ in the Dow’s near 90% plunge between 1929 and 1932. There are legitimate bull markets and then there are fake bull markets, commonly known as a “bull trap”.

This year’s rebound has been concentrated to the “Magnificent 7” — Apple AAPL (+53%), Microsoft MSFT (+42%), Alphabet GOOGL (+34%), Nvidia NVDA (+194%),Tesla TSLA (+155%), and Meta META (+134%). Combined now represent 30% of the S&P500 (+15%) – which doesn’t make the market cap-weighted index as diversified, as it previously was. The Equal Weighed S&P 500 index is only up +5% year to date, which implies a subdued performance for the remaining 493 stocks in the S&P 500. The broader market being supported by ‘one, very skinny pillar’ of support — not a new phenomenon.

Is “This Time Different”?

The market is saying this will time it will be different, AI is going to be the big game changer — it sounds like what was said about the radio in 1929. But that overhyped narrative didn’t stop RCA (Radio Corporation of America) from falling in price from US$549 to US$15 in 1932…an unbelievable (and, in mid-1929, an inconceivable) 97% loss of value.

And, just to prove that when it comes to human nature, everything old is new again, here’s the same pattern repeated prior to the 1929 and 1987 crashes…

The bull case is that that if you bought some of the Dotcom winners at the top you would still be alright — Microsoft did take 17 years to reach break-even, even from the dotcom top in 2016, while Amazon broke back into fresh highs in 2009 — 10 years later.

If you’re right and Nvidia is the clear winner in the AI hype and you have a 15+ year holding period you’d be in the green. To negate this risk you could dollar cost average and spread investments across a larger basket of companies. We wouldn’t want to be too caught up in a sell-off of “bubbly” stocks and prefer to stay on the fence and stay cash heavy —esp. term deposits (they may hit ~6% soon) which isn’t a bad reward to “remain in dry powder”.

Some Thoughts On The “Magnificent Seven” Vs. The “Nifty Fifty".

Today’s “Magnificent Seven” bears a striking resemblance to the “Nifty Fifty” of the 60s/70s which drove the bulk of stock market returns for those two decades. The Nifty Fifty did very well until it didn’t – some of its components have been long forgotten (Burroughs Corporation, Digital Equipment Corporation, Simplicity Pattern) while others will be familiar to the contemporary reader: American Express, Coca-Cola, McDonald’s and so on. It’s worth remembering entropy – everything has an end point. Simplicity Pattern sold sewing patterns, which, as you might imagine, don’t constitute the stuff that makes a top 50 American company anymore. 

Now we have the “Magnificent Seven”, which is wholly more concentrated. It’s driven the bulk of the stock market’s returns YTD and is almost entirely in the tech sector. The Nifty Fifty, on the other hand, included everything from department stores to tech to fast food. The assumptions one could make about investing in it were pretty much a broad-based bet on the American economy. The “Magnificent Seven” is a broad-based bet on tech. Nvidia trades at 218x earnings: think of the bet the investor must make here – that the demand for its chips will more or less triple next year and then double the year after. Tesla trades at 80x earnings (this looks almost sane stacked next to Nvidia): we know this is patently certifiable when we have a track record of the world’s best car companies (Toyota, etc) trading in the low double-digits. And so on. We have more faith in Microsoft, Apple and Alphabet, but we think it’s hard to find any of these “good value” at the moment – to buy a share of the world’s biggest contributors to market returns, you’ve got to pay a pretty penny of a premium. 

Back to the Nifty Fifty: about half of the index would’ve performed pretty well on a 25 year basis afterwards. You’ve got McDonald’s and so on. They’ve done just fine. So it isn’t fair to point to the Nifty Fifty as some kind of perfect evidence of stock market mania – it was more of a mixed basket. One of the Nifty Fifty actually entirely bucked the sell-off post 1982 – Walmart. Walmart returned about 29% compounded from its IPO in 1970 on a 29 year basis. The question is, maybe – would you like to miss out on Walmart?

We think the same could be said of the “Magnificent Seven”. The business case hasn’t particularly changed for Alphabet or so on. We recommended Alphabet, alongside Microsoft, at the end of last year when they were trading on lower multiples. Yet we think it’s worth remembering the Nifty Fifty – about half of the index never recovered post-1982. Attrition is the name of the game.

Disclosure: The BlackBull Research US Model portfolio holds financial positions in Amazon.com, Alphabet (Google), Microsoft Corporation, Apple Inc,  as of the time of this article's publication. Readers are advised to conduct their own research and consult with a qualified financial advisor before making any investment decisions. The information provided in this article is for informational purposes only and does not constitute financial advice