Mission Statement:
To financially empower our clients so that they can achieve their most
important goals and to confidently plan for the future that they envision
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Should you sell Amazon, Apple,
Microsoft, etc.?
The perverse relationship between the stock market and the economy is maddening to a lot of you.
No one can blame you for feeling less than enthusiastic, even downright pissed off, about this divergence between the stock market and the real economy. If the stock market followed the real economy, you’d expect it to be a lot lower today.
The stock market, as measured by four main indexes; the S&P 500, Dow Jones Industrial Average, Nasdaq Composite, and the Russell 2000 (the main stock index for small cap stocks), has a lot of moving parts.
For example, within the S&P 500, the stocks are divided into 11 sectors (or slices, if you prefer) of the economy. These sectors are not divided into equal parts; the tech sector makes up 22% while energy make up only about 6%. The 6 FAANGM stocks (Facebook, Amazon, Apple, Netflix, Google (now called alphabet but still uses the ticker GOOG) and Microsoft make up almost 30% of the index. And since the index is “market cap weighted”, companies with the biggest valuations have the most sway on the direction of the index. The aforementioned stocks are actually benefiting from this coronavirus time because they offer solutions that make this time more livable. Plus, they were performing well over the last 10 years, so they were among the biggest valuations on the stock market prior to the pandemic. Simply put, the pandemic made the big companies bigger and the smaller companies smaller; i.e. airline, bank, energy, and every other sector in the S&P 500, except for technology and communications. Just a side note; when I say communications, I don’t mean AT&T and Verizon. I mean Alphabet, Facebook and Netflix because those 3 make up half of the communications sector. This is yet another example of how the biggest companies are crowding out the smaller ones in many stock indexes.
The harsh reality is that the stock market is doing exactly what it should be doing; separating winners from losers. Again, in this time, the winners are the above companies with the highest valuations, which in turn impact the S&P 500 index calculation because that index is “market cap weighted”.
If you just went by the industrial sector, the stock market would be lower by 17%. Financials are lower by 25%. But the tech sector, which includes Microsoft and Apple, is up 17%. On a historical basis, the difference between these sectors is pretty huge right now.
From this, you could conclude a few things. The rise of the largest tech/communications stocks is not due to any positive view of the economy, but rather that they help us function in a time of social distancing and working from home. They have rising earnings and revenue at this time, which is both highly desirable and exceedingly rare these days; the two qualities that investors seek. The other 9 sectors are down this year due to the economy because they don’t offer growth, so they are shunned by investors. Some may not even be able to survive the pandemic and some already declared bankruptcy.
The big companies mentioned above have represented a gargantuan shift to workforce efficiency, cloud computing, advertising, and eCommerce, since the day they went public. These shifts are secular and not subject to economic cycles like their fellow S&P 500 members. That’s why it appears that nothing can stop them.
The S&P 500 is an index of large companies. If you want an index that follows the economy, you have one already, it’s called GDP; Gross Domestic Product. The thing is, there’s no pure, isolated ETF to trade that figure. You could check out industrial stocks as a way to do that, but in reality, stocks and the economy are not linked closely over the short term.
The YTD chart below demonstrates what would happen if you were to make every stock in the S&P 500 equal weight vs. the current “market cap weight”, to give you a better idea of why the S&P 500 index is holding up so well. Notice the 14%
performance
gap between the two. Both are down YTD, but the equal weight
version
is down a lot more than the market cap weighted version. You could easily see the impact that the ginormous tech/communication stocks have on the index.
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What does it all mean?
Virtually every investor is relying on tech/communications stocks for returns. This is not new and the divergence in the above chart is not as high as it was just before the tech wreck that started in March of 2000, but it is the biggest one since. Can this go on for longer? That’s anyone’s guess. Plus, anyone who has bet against tech in the last 10 years has been burned. Is valuation important? Well, there are 4 companies with 1 Trillion+ valuations now; Apple, Microsoft, Alphabet, and Amazon. Are they great companies? Yes. So far, we haven’t discovered a valuation that is too high. Have giants of previous market cycles fallen from their perch? Yes. IBM, General Motors, Lucent and Xerox; to name a few. Will the current set of market giants lose their dominance? History tells us yes, one day. But that doesn’t do any good for today’s investors who want to know if they should take profits.
Make your decision based on your own personal finance circumstances. Are these stocks taking up too much room in your investment portfolio? If yes and if they go down, they would have an amplified negative affect on your portfolio. This way, you’re right about your decision no matter what happens to these stocks; because your buy and sell decision was based on your own time horizon, risk tolerance, and financial goals.
Another way, albeit more difficult, is if there is a change in the set of conditions that led to these stocks going parabolic. In another perverse relationship, a Covid-19 vaccine could actually be what tips these stocks into price reversal while tipping the rest of the market into an uptrend because the economy would be able to fully reopen.
Even Warren Buffett, whose Berkshire Hathaway is chock full of beaten up bank stocks, is leaning heavily on tech stocks due to an over-sized holding in Apple stock. But even he sold a little Apple recently.
Check out the video below. It's an excerpt from one of my live stream streams this week. I live stream every Monday through Thursday at 4:30 PM ET. I call it "Be the Boss of Your Money". It's full of education and perspective about investing, personal finance, and business. You could catch it on
Facebook
LinkedIn
and
YouTube
And while your watching the video below, please subscribe to my YouTube channel. I'd greatly appreciate it.
Thanks and have a great weekend,
Mitch
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Want to schedule a phone appointment with me to speak about your financial goals? click the "Let's talk" pic.
Or email me directly:
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I opened ClientFirst Strategy, Inc. because I believe that the only way to help my clients potentially achieve their goals is by offering unbiased advice & investment management expertise. To my clients, thank you for your continued vote of confidence. If you are not a client but would like to explore the possibility of becoming one, I invite you to call me directly, visit my website, join my email list, and/or connect with me on social media.
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Mitchell O. Goldberg
AIF®, AAMS
President | Investment Professional
OSJ Manager
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ClientFirst Strategy, Inc.
290 Broadhollow Road, Suite 200 E, Melville, NY 11747
(D) 631-920-6622 (F) 631-920-6624 (C) 516-818-0338
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. The S&P 500 and Dow Jones Industrial Average are indexes. It is not possible to invest directly in an index. *The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. **The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Securities and investment advisory services offered through NEXT Financial Group, Inc., member FINRA/SIPC. ClientFirst Strategy, Inc. is not an affiliate of NEXT Financial Group, Inc.
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