Everybody loves Charts!
Every so often, I’ll check in to show some items floating around Wall Street circles and blogs.
Longer term trends and assumptions in the markets and economy.
Extra details on what I’ve been eyeing as either underappreciated or overhyped.
Best of all, I’ll try to link to some well put together explainers on the concepts.
**Everything as of 5/24/2023
Poor Market Breadth
Financial media, Twitter and other talking heads continue to focus on the phenomenon of poor market breadth driving equity indices — only a very small number of stocks are driving all the gains this year in the Nasdaq and S&P500.
I spoke about the risks of this several weeks back specifically with the Mega Cap Tech stocks’ new A.I. Innovations. (MSFT, GOOGL, AMZN, META, NVDA, CRM)
Thoughts on Markets #004
Everybody loves Charts! Every so often, I’ll check in to show some items floating around Wall Street circles and blogs. Longer term trends and assumptions in the markets and economy. Extra details on what I’ve been eyeing as either underappreciated or overhyped.
I’m noticing however the actual frequency and persistence of this phenomenon through the years may be overlooked, creating the impression we’re in a more fragile and abnormal state than other times in the past.
Personal Finance Club has several charts showing the market weighting and breadth distribution over longer time periods.
The Nifty Fifty stocks were the 1970s equivalent of today’s FAANG . They drove index returns for years as the darlings of Wall Street. Trading at 40x earnings or higher was common and persistent— far above the long-term market average of about 15x to 20x
Looking back at S&P 500 returns during the 20th century, we can see some stellar periods produced by some familiar names but none are thought “sexy” or aggressive by today’s standards.
IBM: International Business Machines (IBM) was THE prominent technology company in the 20th century. “Big Blue” contributed significantly to the S&P 500 returns. IBM was involved in computer hardware, software, and IT services even back then.
AT&T: "Ma Bell" was another important contributor to the S&P 500 returns during the 20th century. It played a significant role in the development of the telecommunications industry and had a substantial market presence.
ExxonMobil: but without the “Mobil”. As one of the largest publicly traded energy companies, its performance played a crucial role in the index's overall returns even during times of OPEC oil strikes and gas lines.
So why does this outsized impact on indices from a few companies happen and matter?
1 . Design of S&P500 creates a “Rich Get Richer” quirk
The S&P500 is cap weighted. Bigger companies have bigger weight and bigger influence. Generally, a company grows in market cap because it’s revenue and profits are accelerating. Also, growing companies tend to continue growing and this momentum creates more and more interest and demand for the company.
Index rotation rules are the key to locking in gains.
The “self-correcting” nature of index funds is why the S&P500 did not crater when Sears Roebuck went bankrupt or when Eastman Kodak shriveled on the vine.
If you bought an index fund in June of 1973, you would have realized that 16,370% return without doing any work of picking stocks. An index fund automatically adds the newest/smallest companies as they become big enough to be listed and drop the oldest/dying companies as they fall off the list.
That means you always own the biggest and growing stocks, in proportion to their size. Things will continue to fall in and out of favor in the stock market as the economic landscape changes. If the tech giants of today aren’t going to be the biggest companies of next decade, who is? Who cares! Because we own them all and we’ll benefit from the growth of every company.
TRADERDADS MAILBAG
Thoughts? Questions? Comments?
Reach out! Maybe I’ll do a full post on the topic or as a Q&A
traderdads@substack.com
