Datatrek summarized things this way: “Without 5 Big Tech names, S&P 500 earnings would be down 6.0 pct in Q1 rather than the consensus estimate of +0.5 pct growth. AMZN, GOOG, META, MSFT and NVDA are the difference. The ‘S&P 495’ are expected to turn the corner later this year, supporting current equity market valuations” (Datatrek Morning Briefing, April 22, 2024, by subscription). So, what does an investor do? Concentrate or diversify?
My colleague Matt McAleer discussed the issue of concentration versus diversification in Cumberland’s “Week in Review” YouTube on April 19. Here’s the link: https://www.cumber.com/market-commentary/cumberland-advisors-week-review-digest-apr-15-apr-19-2024. Please take 4 minutes to hear Matt’s analysis.
In order to demonstrate the issue Matt discussed, we are borrowing two charts and wish to thank Ben Stevens of AMG for obtaining permission so we may share them with our readers. The charts show the “Magnificent 7” stocks and their returns for three years: 2021, 2022, 2023. The returns are shown year by year and cumulatively.
Here’s chart 1 showing the individual returns of the members of the Mag 7 over three successive years.
Now here’s the cumulative return of the Mag 7 stock package, compared against the S&P 500.
Let’s discuss the issue.
The Mag 7 has clearly had a terrific single year and a good cumulative three years. Note what happened to each of the seven members. Also note the cumulative trend of the 7-stock basket compared with the S&P 500, which has gradually closed the gap as time progressed.
Will the gap between the basket of Mag-7 and the S&P 500 fully close? We don’t know but are watching the adjustment taking place in the best performer of the 7, NVDA. Will another of the 7 resurge into a leadership role? Will the worst performer of the 7, TSLA, continue to deteriorate or reverse direction and start to outperform? We don’t know.
But we do observe how the diversification strategy that Matt discusses works over a period of time. In order to outperform, a trader needs to be nimble enough to know when to switch from concentration to diversification and when to switch back. There are some who do it successfully, and there are others who are not so lucky or smart.
Cumberland has strategies that address this issue. I personally favor the diversification of risk approach. I don’t know how to make the switch perfectly and in a timely enough way. But I believe that ETFs make use of the more diversified strategies easier to implement.
For details on these Cumberland strategies and for questions, please contact Matt McAleer directly. His contact information is:
You can reach him at:
Email: [email protected]
X (Twitter): https://twitter.com/matthewcmcaleer
LinkedIn: https://www.linkedin.com/in/matthew-c-mcaleer/
Call Matt: (800) 257-7013 ext. 346
David R. Kotok
Co-Founder & Chief Investment Officer
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