Will the Magnificent Seven Crash Like the Nifty Fifty Did?

One of the advantages of being a seasoned investor is that when something feels new to young traders, I can immediately perceive that it’s happened before. A textbook example is the rapid ascent of the Magnificent Seven stocks, which might seem unprecedented but really isn’t.

There’s more than one analogue, actually. The most obvious parallel is between today’s Mag-7 rally and the dot-com bubble from the year 2000, when traders pumped money into practically every internet-related company.

We can replace “internet” with “AI” and see how 2024 closely represents 2000. Sure, the internet changed the tech world in a permanent way, and the same might be said about artificial intelligence. Yet, this doesn’t mean AI-related stocks can just keep going up in a straight line, any more than internet stocks did.

Yet, for younger investors, I’d like to direct your attention to a time when the companies that dominated stock-market indexes weren’t Apple, Amazon, and Microsoft. Rather, they were names like General Motors and General Electric.

Today, energy giants like Exxon Mobil and Chevron are out of favor on Wall Street. Half a century ago, however, they were broad-market leaders. Back then, there was no talk of wind farms replacing oil and natural gas.

Courtesy: @Mayhem4Markets

This was the early 1970s, not long after America put the first man on the moon. The nation was sharply divided over the Vietnam War, but investors generally agreed that the Nifty Fifty group of high-flying stocks would continue to push higher.

The painful lessons learned from the 1929 stock-market collapse were far back in the rear-view mirror. The baby boomers were making their voices hear, loud and proud. Times were tough for many Americans, but at least the dream of having a home, a white picket fence, and 2.5 kids seemed attainable.

Then the bottom fell out of the economy and financial markets in 1973. This wasn’t like the COVID-19 crisis of 2020, when stocks fell for a month and a half and then immediately rebounded.

No, this was prolonged stagflation that persisted, more or less, through the end of the decade of the 1970s. Oil embargoes, long lines at the gas pumps, a hostage crisis, and the resignation of a president marked the malaise days of a dreadful decade for the U.S. economy.

It took nothing less than Federal Reserve Chairman Paul Volcker hiking interest rates to 15% in the early 1980s, thereby precipitating a brief economic recession, to finally put an end to this. Back then, it was politically feasible to ask Americans to tighten their belts for a little while.

That wouldn’t and couldn’t happen in the 2020s, unfortunately. There simply isn’t the discipline or the political will to elect tough-talking leaders anymore. Handouts for the 99% and bailouts for the 1% are expected, as the culture has changed dramatically since the financial crisis of 2008 to 2009.

Courtesy: @Barchart

Since then, the market assumes that the “Fed put” will always be in place and every dip in the stock market is meant to be bought without hesitation. Heck, even a global pandemic couldn’t keep stock prices down for more than a couple of months.

And now, sentiment runs high as short-term stock traders conveniently ignore the lessons of the Nifty Fifty and the dot-com bubble. They’re operating under the assumption that this time is different, Americans can borrow and spend their way to prosperity, and AI will boost corporate productivity and profits for years to come.

Those assumptions have already been priced into large-cap technology stocks. At the same time, the S&P 500 and NASDAQ are market-cap-weighed, so as long as a half-dozen mega-caps continue to run higher, the market will continue to look healthy on the surface.

And so, what they called “nifty” half a century ago, they’re calling “magnificent” today. It’s easy to see the parallels if you’ve been in the investing game for a while. But if you’re new, you can at least learn from folks who’ve been there and done that, if you’re willing to listen.