Herd Mentality
Submitted by Bond & Devick Wealth Partners on January 10th, 2024“I think herd mentality is a good thing overall. Because if every sheep had to figure out the velocity of the wolf and their personal risk, that would take forever.” ~Neal Barnard
Herd Mentality
It may be that herd mentality is burned into our DNA just like that of sheep. Sticking together, moving together, and not deviating from the course of those around us probably does increase the likelihood that we will survive. But when it comes to market and economic predictions, the herd mentality (witnessed through the lens of consensus) can make the herd look plain silly at times.
At the end of 2022 the investment herd (consensus) called for a recession, for unemployment to spike and the markets to struggle. We were in for a rough ride as the Federal Reserve was too slow to act and inflation would likely remain elevated for quite some time and corporate earnings would falter. The economy was in for a “hard” landing.
Instead, the economy strengthened over the course of the year growing by an astonishing 5.2% (Bureau of Economic Analysis) in the third quarter and unemployment has been below 4% for 22 months in a row for the first time since the late 1960’s. For those of you who have access to the New York Times, we recommend reviewing their “11 Charts that explain the Year in Business, Technology and the Economy” published on January 30, 2023. The charts show inflation heading dramatically lower in the US while wage growth surpassed the Consumer Price Index (inflation) in November (CPI up 3.1% versus average hourly earnings up 4%).
There are times when the investment herd runs in the same direction which can create opportunity, at least in the short-term. Last year the stocks that comprise the Magnificent Seven returned between 48% (Apple) and 218% (NVIDIA). If your portfolio did not include a decent exposure to these stocks in 2023 you most likely lagged these eyepopping returns. For those with short memories, it might be helpful to remember that the Magnificent Seven collectively finished 2022 down 40% with Meta down over 60%, Tesla down 65% and NVIDIA down over 50% (Morningstar). It is a reminder that concentrated portfolios may provide the investor with strong upside potential, but diversification is the tool we use to preserve and protect the wealth we’ve accumulated.
According to the Wall Street Journal (December 17, 2023), the Magnificent Seven (Apple, Alphabet, Amazon, Nvidia, Microsoft, Tesla, and Meta) have a higher weighting in the MSCI World Index than all of the stocks in the UK, China, France and Japan combined. A few years back, we wrote that we believed the biggest risk to owning the stocks of these large, dominant companies was regulatory risk. At some point governments may worry about the power of these companies as they grow more prominent in society and make profits that were heretofore inconceivable. This year will assuredly provide plenty of opportunities and risk, which is why we remain balanced and diversified, squarely focused on our clients’ goals.
Wishing you all a happy, healthy, and prosperous 2024.
The Bond&Devick Team