'New normal' for investors: shifting conditions and advice on how to navigate this uncertain period

What are the main characteristics that define the "new normal" and how do they affect investment decisions?

Revaluation of markets and concentration of shares

The most visible manifestation of the "new normal" is the high concentration of leading stocks united in the Magnificent 7 group. It includes the technology giants Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, which significantly influence the re-evaluation of stock markets.

If seven were excluded from the S&P 500, the projected return on this index would be significantly lower.

What's next for Magnificent 7 shares? The terms "Magnificent 6" (which clearly increases concentration), as Tesla shares have underperformed the S&P 500 among the top names this year, as well as "Magnificent 4", which also excludes Apple and Google due to weak growth figures, appeared this quarter.

The current dynamics create risks similar to the dotcom bubble period of the early 2000s and even the Nifty-50 era of the 1970s.

Stock market history has well-known examples of RCA, Kodak, Polaroid, Atari, Commodore, Nokia, Novell, Digital, Sinclair, Wang, Iomega, Corel, Netscape, Altavista, AOL, Compaq, Sun, Lucent, 3Com, and RIM, which were once market leaders, and now many investors are not even aware of such names.

The NY FED's official indicator of the likelihood of a recession continues to rise, which directly points to general risks in the economy that are not yet priced in. Under these conditions, it cannot be ruled out that the Magnificent 7 company will experience the scenario of its predecessors. Even if Nvidia manages to avoid it, that unfortunately doesn't make it a good investment at current valuations.

It is currently unpopular to use the term 'bubble' to describe what's happening in the market, but it is quite difficult to shake off the feeling of déjà vu from previous crises.

A concentrated index poses a serious threat to hedge fund managers because the only way to outperform a benchmark in the form of stock indexes is to chase a number of stocks with extremely high valuations.

Controversial factors: liquidity and the labor market

Another sign of the "new normal" is a clear dissonance between the factors that favorably affect the market and those that cause concern among investors. The first include the growth of the US economy and a decrease in inflationary expectations. Economic growth in the United States turned out to be much stronger than expected. Inflation expectations (according to the five-year forecast) have fallen from 2.5% to 2.25%, and a number of inflation data (notably wage inflation) indicate that the worst of the inflationary surge is behind us.

Unfavorable factors include rising unemployment and risks associated with possible stagflation reminiscent of the 1970s. Increased volatility associated with the Fed's liquidity and changes in the quantitative easing program is also making adjustments to the stability of market dynamics. Under the current conditions, many market participants began to build their investment strategies in relation to the interest rate policy. This applies not only to debt markets, where decisions are mainly made on the basis of interest rates, but also to stock markets. It is thus likely that in the near future the market correction will depend on the expectations of interest rates, and to a lesser extent on the slowdown of economic growth.

Inflation and interest rates (along with employment) became the dominant macroeconomic category. The approaches of modern investors have definitely changed, because in their strategies they do not take into account real returns, but growth factors. In our opinion, too long a pause in interest rate cuts has a negative impact on the market — investors will begin to consider negative growth scenarios and, accordingly, reduce the calculated projected multipliers.

Real estate - negative outlook, insurance - positive

Not everything is going smoothly in the real estate and construction market, which is one of the favorites among investors. In the conditions of rising mortgage rates, the construction of new houses is under pressure, which, in turn, may lead to a decrease in housing prices in the near future. This affects the strategies of investors, who must take into account the potential deterioration of the situation in the construction industry and changes in consumer demand.

Among the sectors that could benefit from the current economic conditions is the insurance sector, particularly life insurance, thanks to a possible normalization of the bond yield curve.

Recommendations

Given the current market conditions, the following recommendations can be made.

Diversification of the investment portfolio. Given the high concentration in the stock market and possible changes in economic dynamics, it is critical to allocate investments among different assets and sectors.

A cautious approach to technology. It is important to monitor companies with high valuations in the technology sector, especially given the potential risks of energy constraints and changes in energy consumption.

Attention to macroeconomic indicators. Data on interest rates, inflation and the labor market should be carefully analyzed in order to adequately respond to changes in the economic environment.

Study of the insurance and construction sectors. Shifts in the bond yield curve may offer investment opportunities in the insurance sector and warrant a cautious approach to construction investment.

It is important that both market irrationality and behavioral changes are taken into account in investment strategies for the coming quarters. Investors will likely begin to consider higher risks in light of current and future macroeconomic signals. Therefore, the dynamics of the Fed's liquidity and the deterioration of the situation on the labor market, together with inflationary processes, can make corrections in market concentration and increase volatility.

In the era of the "new normal", past models and approaches no longer invariably work, requiring investors to analyze more deeply and quickly adapt to new conditions.