How much of your retirement savings are you currently gambling with the fortune of just six companies?
If you have them on an S&P 500 SPX,
Stock index fund, the answer is: about a quarter.
That’s what the so-called “FANMAG” —Facebook FB,
Apple AAPL,
Netflix NFLX,
Microsoft MSFT,
Amazon AMZN,
and Google (“Alphabet”) GOOG,
– Now counts the US Blue Chip Index by value. And that’s the amount of every $ 1 you have in an S&P 500 index fund, like State Street SPDR S&P 500 Trust SPY,
You are investing in just these half a dozen companies.
(Only Apple, Microsoft, Amazon and Google represent 21% of the index).
Yes, these companies are gigantic and global. However, this raises serious questions about claims that the S&P 500 only gives you broad diversification of your investment risk. It also casts doubt on whether the index somehow represents the entire U.S. economy, and explains why the index has levitated so far this spring, even as the economic rebound has stabilized (or worse).
“The performance of the stock markets, especially in the United States, during the coronavirus pandemic seems to defy logic,” says Yale Nobel Prize-winning economist Robert Shiller. With the crater of demand dragging investment and jobs, what could be keeping stock prices afloat? The more the economic fundamentals and the market results diverge, the deeper the mystery becomes … ”
And as noted elsewhere, the index is currently valued at 30 times the average earnings per share for the past decade. Before this year, it has only equaled or exceeded that level twice since records began in the 1880s – in 2000 and 1929.
Ah yes, good times.
However, much of this is due to just those six stocks, plus a few other growth-oriented companies.
This is why the total dividend yield on the S&P 500 is only 1.8%, but according to a FactSet screen, the average company in the index is yielding 3%.
Of the index’s gains since the March 23 low, no less than 30% comes from those six stocks. Most of the rest of the blue chip index (the S&P 494?) Has still been singing the blues. Since the brief market euphoria peaked early last month, for example, casino stocks have fallen 18% on average, department stores 19%, hotels, resorts and cruise lines 25 %, and airlines 28%, according to market data provider FactSet. American Airlines AAL,
it’s down 40%, United UAL,
35% and southwest LUV,
18% MGM Resorts MGM,
it has lost a third of its value. Carnival CCL,
another 40%. Macy’s M,
it’s down another 30%.
And keep in mind: those are not the stock declines since the crisis began in late February. These are the declines since the “recovery” rally in early June. Measured since the beginning of the year, its declines in many cases are catastrophic.
Small and medium-sized stocks, which are often seen as a better indicator of Main Street’s economic health than megalayers, have also lagged behind the S&P 500, by far. (In addition to the broader feeling of sadness about the rebound has been the drop in long-term interest rates as well. A 10-year Treasury note now pays just 0.63% a year, one-third less than in the early Last month, all of this, even after Uncle Sam and the Federal Reserve have flooded the economy with about $ 5 trillion in “free” money.
Where does this leave the ordinary index fund investor? Bottom line: Possibly exposed to fundamental index risks that you may not realize. They are betting heavily on the FANMAGs. (If Tesla TSLA is fired,
now valued at nearly $ 300 billion, join them maybe we can call them the FATMANG)
“The idea that equity indices are risk-free states has always been, in my opinion, a dangerous fallacy that has been amplified by increased passive investment,” says Mark Urquhart, money manager at Baillie Gifford. in Edinburgh, Scotland. “Actually, the three significant market crises my career has contained – technology, media and telecommunications (TMT), the financial crisis and now the coronavirus – have been linked to so much damage done to particular parts of the index that it is demolishing. the thesis that indexed investment can diversify that risk. “
There are two possible risks. The first is that we see an economic rebound in the coming quarters, and the owners of index funds are lost, because these large super-stocks have already recovered. We saw some of that on Wednesday, when news of a possible shot sent “Main Street” stocks booming 10% or more, while the overall index rose less than 1%. The second risk is that we don’t see an economic rebound … and investors decide that these gigantic boom stocks are overvalued in a recession.
That’s what happened after the 1999-2000 dot-com bubble. Large indices, such as the S&P 500 (and the Nasdaq Composite COMP,
) Collapsed. But those who had rejected fashion names, and had cheap and loveless stocks of value, posed as bandits.
The dot-com mania poster in many ways was telecommunications equipment giant Cisco CSCO,
At the peak of insanity, it was valued at triple-digit forecast gains, peaking at around 130 times. Then people wondered what they had been thinking.
Amazon actions this week? Oh, 103 times they forecast profit.
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