Bull markets and bubbles – Damien’s Market Update – March 2024

5 min Read Published: 21 Mar 2024

Welcome to the latest episode of my monthly YouTube show where I discuss what is happening in investment markets and what to look out for. In this episode, I discuss how the recent trends in investment markets is not solely a surge in AI stocks but rather a broader rally encompassing nearly every sector.

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Abridged transcript - Damien's Market Update - March 2024

So we finished February with equity investors being rescued by the Magnificent 7 once again, most notably Nvidia. Also the year to date divergence in terms of performance between global equities and bonds (with the former generally pushing to new high while the later fell in value) hinted at equity investors ruling out the possibility of a second-spike in inflation and looking forward to the next part of the economic cycle, and rate cuts. With bond yields generally sitting near their 2024 highs, the bond market didn’t appear so confident. As we’ve moved through March things continued in a similar vein. US equities have demonstrated remarkable resilience, encapsulating the bullish sentiment that has defined much of 2024. This resilience was notably evident when the US stocks quickly recovered from a short inflation-induced wobble, when the US annual inflation rate came in 3.2% rather than the expected 3.1%. This reaction reaffirms the stock market shift towards focusing on growth prospects rather than inflation fears and clearly equity investors deem the US economy to be in a Goldilocks scenario, with inflation not too hot to be a problem but not too cold to cause concern about economic growth prospects. Despite the equity market’s Goldilocks obsession, bond markets are still not as ready to dismiss the threat of a second wave of inflation, as evidenced by the 10 year US treasury yield pushing back towards its 2024 highs once again. It’s not been a great month for bond investors. The 10 year US treasury yield currently sits at 4.3% which is higher than the 4.18% level it started March at. Remember. Higher bond yields mean lower bond prices. It also means that the divergence between the fortunes of bond and equity markets that I mentioned at the start of this episode, continues. With the US bond market dwarfing the equity market in size, it is a brave investor who dismisses the bond market’s concerns out of hand.

But equity investors have also been emboldened by signs of improving market breadth in the US stock market during March. That is assuming you base your breadth assumption on the percentage of stocks in the S&P 500 above their respective 200-Day moving average. And of course there are other measures you could use that may paint a slightly less rosy picture.

If you have a well diversified portfolio and have been paying attention you may also have noticed a change in what has been driving your overall portfolio returns. During the first two months of 2024, investors’ returns were saved by the Magnificent 7. However since late February the Magnificent 7 as a collective have marginally underperformed the wider S&P 500. This isn’t necessarily a bad thing, as it can be taken as another sign of improving breadth as other sectors take over leadership in the current US equity bull market, potentially mitigating some of the concerns regarding the over-concentration of the US stock market (with the Magnificent 7 for 27% of the S&P 500 by market cap).

As an aside, investment bank UBS recently published some analysis that showed that the US stock market is actually not that concentrated when put into a global context. In fact the US is among the least concentrated stock markets of those analysed. It might surprise many people to learn that the top 10 stocks in the UK account for 36% of the total market compared to 25% in the US.

What makes the Mag7 stand out is just how well they have performed since 2023 as a group, rising 13.5% from the start of the year up until the middle of March, compared to 8.1% for the wider S&P 500. By contrast, the top 7 stocks in the FTSE 100 based on market cap have fallen by -1.53% over the same period. That compares to a return of -0.64% for the wider FTSE 100 index. Concentration risk is not a uniquely US phenomenon and is an issue in other parts of your portfolio too. But with US equities often being the largest constituents of most global funds (often accounting for at least 60% of a fund’s assets) you have to work a bit harder if you want to diversify your portfolio away from the Mag7.

But with newspaper headlines obsessively focussed on the likes of Nvidia and other AI stocks investors are overlooking investment opportunities elsewhere. For example, in recent weeks we’ve seen new all-time highs on the Japanese Nikkei 225, the German Dax, the Euro Stoxx 50 and on the Indian stock market to name a few. It will also have passed many by that gold has hit a new-all time high as well. This has been mostly a result of the anticipation of interest rate cuts in the US.

Meanwhile digital gold, in the form of Bitcoin, has also hit new all-time highs but for very different reasons. Primarily Bitcoin is riding a wave of demand after US regulators approved the sale of Bitcoin ETFs in January. Few other assets capture the boom, bust, mania and despair of armchair investors as much as bitcoin. In 2024 the price of bitcoin has gone parabolic.

But investors haven’t had it all their own way in March. In the last week we’ve seen some of the exuberance being taken out of a number of established bull markets (including bitcoin), whether by choice or by force. That's not necessarily a bad thing. I say by force because in reference to India where the government has moved to stem over-speculation in the Indian stock market, which has surged 40% in the last 12 months.

But with the US Federal Reserve and the Bank of England both announcing that they are holding rates in the last 24 hours, and with the Fed suggesting that there will be 0.75% of rate cuts this year, the investors’ animal enthusiasm has returned. The S&P 500 and the Nasdaq Composite both set new all-time highs yesterday. Even Chinese stocks have entered bull market territory, after being the global laggard. In summary what we’ve been experiencing across investment markets is not just a rally in AI stocks but a rally in almost everything. If the Mag7 are in bubble territory there is an argument that almost everything is. While risks are obviously rising and that may feel uncomfortable, it's worth remembering that market conditions like those we've experienced recently are when your portfolio usually makes the most money.