As we begin 2024, the market appears to have rallied from the tumult and upheaval that defined it in 2022. Several supply chain headaches, 11 interest rate hikes, a war in the Middle East and countless warnings of an impending recession later, the economy has seen a considerable advance within its most volatile sector, mega-cap technology. While there was a time when prominent stocks in this area would be the first to exhibit signs of a downturn, in recent months they—along with short-term treasuries—have become investors’ preferred safe haven for allocating capital. This shift has occurred largely due to the strength of the so-called "Magnificent Seven” stocks that have outperformed the rest of the market, namely, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Likewise, 2023 also saw investors contend with a medium-sized bank scare. While the relentless turnover of the news cycle may have pushed this to the background of people’s minds in subsequent months, this shock to the system alerted many to the realization that leaving money in savings accounts not only yields very little, but carries its own set of inherent risks. Consequently, there’s been a mass movement toward buying money market mutual funds as their generous yields become a viable alternative.
As things stand, it’s understandable why some investors have been quick to celebrate. Many of these mega-cap tech stocks have exceeded pre-pandemic highs while the overall enthusiasm around technology has been buoyed by a renewed focus on the commercialization of AI and self-learning language models. Although many are still speaking about the market in bearish terms, by and large people are behaving bullishly.
While it may be an enticing prospect to remain complacent with existing portfolio constructions, it would be prudent for investors to look outside of the narrowly concentrated areas dominating the current conversation and begin positioning their allocations for 2024 and beyond. After the turmoil of 2022, it’s natural to feel relieved that not only have we made it this far without a recession, but that some are forecasting bullish conditions ahead following the excruciatingly bearish circumstances of the post-pandemic market. If there are any forward-looking lessons to be applied from the 2022 economy, it’s to not let yourself get caught flat-footed no matter how stable or abundant the ground beneath you may seem. Rather than getting too comfortable with where you’re standing right now, thoughtful investors should be scouting the terrain they’d like to wind up in and consider the steps they’ll need to take to position themselves there.
Given the sheer amount of noise and raw information that’s available, it can be hard to separate short-term speculation from more viable long-term investments. This is compounded by the inherently future-facing nature of the tech sector as well as the outsized space it occupies in the current indexes. Even so, making the distinction is crucial: leaning on mega-cap tech positions to carry a portfolio is a fundamental extension of the pre-2022 thinking that led to innumerable net value thrashings. The more thoughtfully diversified a portfolio is through varied asset classes and industries, the more properly durable it is.
Looking ahead, investors need to sift through the hype and present material conditions to determine where we actually are in the economic cycle, publicized areas for potential investments aside. Any assessment of where the U.S. and world economies will be in the next 18 to 36 months should include considerations for how to thoughtfully incorporate fixed-income investments as a portion of the portfolio. Just as the current popularity of mega-cap tech stocks doesn’t ensure their long-term ability to generate consistent returns, the same is true of relying on recent high yields as a lone metric for selecting allocations. When examining companies, pragmatic investors should consider the good or service offered and make sure they have a sufficient understanding of what’s being presented as well as its potential. This means looking at the overall sector and competitors along with the business’s capacity for increasing share and future innovation. Ideally, there should be a driving catalyst beyond encouraging numbers alone.
These same considerations should be given to integrating select large and mid-capitalization dividend paying companies that offer further growth and diversification into a well-rounded portfolio. With regard to dividends, any company that’s managed to both allocate cash flow to shareholders annually and increase their dividend payouts by 7-9% per year should be viewed as possessing a proven track record of success. An example of a stock meeting this criterion is General Dynamics: the global aerospace and defense company currently boasts a $68 billion market cap alongside a dividend yield of 2.1% and a five-year dividend growth rate of approximately 8%. Due to the ongoing post-pandemic travel boom and perpetual demand to address defense needs, GD’s services will remain valuable well into the foreseeable future, making it a shrewd stock to invest in for the short and long term alike.
Similarly, the global uncertainty solidifying GD’s place within the market is also helping to fuel Chevron. The energy company recently raised its quarterly dividend per share by 6% and has experienced 36 consecutive years of dividend growth. Within one of the sectors powered by Chevron’s product, consumer vehicles, the Atlanta-based Genuine Parts Company has also benefited from macro trends to stand out as a worthwhile investment. The global automotive replacement parts supplier has established its reliability among consumers and investors alike, as it is now in its 66th consecutive year of dividend increases with a 2.7% yield. As the fallout from inflation and rising interest rates continues to decelerate new vehicle purchases, the need for consumers to repair and keep their used cars in good order is as high as it’s ever been. Subsequently, it’s difficult to imagine a more reliable business—and in turn investment—than a trusted company that’s responsible for supplying brake pads, batteries, tires and the like on a comprehensive scale. Investors who don’t want to be beholden to the whims of the market should always be probing for opportunities to buy high-quality assets with healthy balance sheets and a well-established history; not only are these businesses solvent, but their growth can be tracked through the gains distributed among shareholders over an extended period of time. Even if they’re not the flashiest or most-talked-about purchases, these are the investments that should take top priority.
Although there’s currently a lot of momentum behind mega-cap tech stocks, investors need to remain cautious about falling into the same traps that ensnared all too many portfolios last year. De-risking and diversifying portfolios may not guarantee the instant gratification of netting dazzling returns in a bull market, but in light of the inflation that’s run rampant in recent years, it does ensure security and tangible gains across the time span that matters most: the long run.
Bob Kalman is co-founder and senior portfolio manager at Miramar Capital.