Top Heavy
Doug Walters
Five stocks in the S&P 500 have contributed all of the returns year-to-date, and then some. That dynamic creates both risk and opportunity.
Contributed by Doug Walters , Max Berkovich ,
U.S. stocks were up nicely again this week, led predominately by growth stocks. Investors continue to support equities despite challenging economic data, thanks to an accommodative Fed. With that said, and as we have mentioned repeatedly in recent weeks, market leadership is very shallow. It is a handful of very large stocks, namely Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) that have lifted market-cap based indexes, like the S&P 500 to all-time highs. Here are some statistics to further underline that point:
- The S&P 500 is up over 9% year-to-date. Microsoft, Apple, Amazon, Alphabet, and Facebook alone contributed over ten percentage points of that return, meaning that the other 495 names altogether contributed negatively to performance.
- Of the 500 companies in the index, only about 160 have an above-average performance for the year; 340 have underperformed.
Given the above dynamics, should investors be cautious on equities? Not necessarily.
- First, the fact that the performance of the S&P 500 is driven by just a few stocks, indicates there is a potential opportunity in other stocks should the economic outlook improve.
- Second, the Fed will continue to do what it can to be accommodative, and Powell’s comments at the Jackson Hole symposium this week confirmed that.
- Third, there is a record amount of money sitting on the sidelines in cash, nearly $5 Trillion, awaiting the end of the pandemic. A return to normality will likely coax this money off the bench and into equities.
With that said, it may be a good time to consider replacing your traditional, market-cap-weighted index, like the S&P 500, with one that is fundamentals-based. Our preference is multifactor funds, as evidence shows that over the long run, there are certain persistent factors (like Quality, Value, Momentum, and Size) that have benefited investor portfolios.
Headlines This Week
Contributed by Gregory Mattacola
Mining for Inflation
- During the Jackson Hole economic symposium on Thursday, Federal Reserve Chairman Powell announced that the central bank will now target an average inflation rate of 2%. With inflation very low currently, the implication is they will be trying to bring inflation above 2% in the near-term.
- For years, our Federal Reserve has targeted inflation at 2%, with many periods undershooting their target. The Fed is hoping that a focus on an average inflation target will help them to achieve their desired long-term outcome.
- While the Fed may give investors the thumbs up on holding risk assets, such as equity and gold, many remain skeptical that the Fed will be able to fuel inflation.
Stimulus
- Speaker Pelosi said the House is willing to come down to a roughly $2.2T stimulus package, but the White House has yet to show their support for the bill.
- Do not expect the stimulus deal anytime soon. The timeline has shifted to late September when Congress will have to pass a stopgap measure to prevent a government shutdown on October 1st.
Back to Shopping
- Consumers went back to shopping this summer, as lockdowns eased.
- The personal consumption expenditures and personal income for the month of July, were higher than expected.
- New home sales remain strong, while supply remains at historic lows.
The Week Ahead
Jobs Friday
- The monthly Non-Farm Payroll report is expected to report 15.5 Million unemployed Americans, down from 17.6 Million in July.
- The weekly Claims Report on Thursday will also be of importance. With weekly claims hovering over 1 Million, a declining trend would be welcomed.
Fed Speak
- The Beige Book, which is a summary of comments on current economic conditions, will be released next week right in time for Central Bankers to face the public.
- Vice-Chairman Richard Clarida, Member of the Board of Governors Lael Brainard, John Williams from NY, and Cleveland’s Loretta Mester are on the docket.
Splitsville
- Monday will be the day when Apple Corp. (AAPL) & Tesla, Inc (TSLA) split their stocks.
- For every share of Apple, investors will now own four, and for Tesla, one share will become five.
- The value of the positions will not change as the price of each share will be adjusted proportionally as well.
DOW and Out
- Thanks to the split of Apple stock, the Dow Jones Industrial Average will re-jigger its constituents on Monday.
- The widely followed (though not very useful) index is kicking Exxon Mobil Corp. (XOM), Pfizer Inc. (PFE), and Raytheon Technologies Corp. (RTX) out to make room for Amgen Inc. (AMGN), Salesforce.com, Inc. (CRM) and Honeywell International Inc. (HON).
- With $31 Billion benchmarked to that index, it will force a lot of those investment vehicles to change their holdings.
- The S&P 500 index, for the record, has $12 Trillion benchmarked to it according to Barron’s.
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