A MARKET OF IMBALANCES

Many times, I have commented about market imbalances, imbalances that I think today is at extreme levels.

Technology companies comprise a record 23% of the S & P 500. However, a strong argument can be made that tech comprises over 50% of this marquee average if the descriptive nomenclature is changed or challenged.

For example, Amazon—the third largest company in the S & P 500—is classified as a “consumer discretionary” company. Google and Facebook—the fourth and fifth largest companies—are classified as “communication.” Netflix—the 23rd largest company is also classified as “communication.”

Wow! Yes, Microsoft and Apple—the two largest S & P 500 companies are classified as “technology” so is number 14 company Intel.

It should be noted according to Barons 10 mega sized tech companies comprise an unfathomable 44% of NASADAQ’s capitalization. The NASDAQ is comprised of 2,702 companies.

This massive weighting has greatly impacted returns as the Russell 1000 growth index is up almost 57% for the last three years while the Russell 1000 value index is almost flat. This is a record disparity.

[Note: According to Bloomberg the number of growth stocks in the Russell 1000 growth will fall from 533 today to a record low of 421 when the reshuffling of portfolio occurs at the end of June. The proverbial “oligopolistic trend” towards the mega caps is now on hyper drive.]

There are volumes written as to why there is this record disparity but simplistically speaking there is massively more buying in growth rather in value. Some have argued the disparity is the greatest since 1949 when Benjamin Graham wrote The Intelligent Investor or the value treatise that is the backdrop for Warren Buffet’s Berkshire Hathaway.

It is human nature to extrapolate the current into infinity. However, the only certainty is change. Will today’s collapse of the multipolarity and interdependent world order be a potential catalyst? Or the potential ramifications of the exploding national debt which by definition should cause higher interest rates be a possible cause?

Unfortunately, only history can answer this question.

Radically changing topics, equites fell following Dr. Fauci’s Congressional testimony warning against reopening the economy to soon, triggering a potential outbreak and setting the road to potential recovery further back. In my view Dr. Fauci broke no new ground.

Speaking of the economy, yesterday three different Federal Reserve Presidents offered a stark warning if the economy does not open within the next 90-120 days. All three stated business failures will rise on a grand scale, risking a depression.

Similar to Fauci’s remarks, the remarks from three top Fed officials broke no new ground, reiterating prior remarks.

Yesterday the Democrats unveiled a $3 trillion aid bill. It is widely regarded as a progressive wish list.

Some of the more onerous provisions include $1 trillion to state and local governments, extending the $600 per week additional unemployment insurance to January 31 from July 31, providing households with an additional $6,000 including payments to non-documented immigrants, the bailing out of some trade associations and professional organizations, and a safe harbor provision for banks that provide services to cannabis companies given that cannabis sales are still illegal in many states.

Regarding legal protection for companies against Coronavirus law suits, House Speaker Pelosi stated “the House will not be cavalier about granting legal protections as the health of all workers must be protected.”

It is largely regarded as dead on arrival in the Senate.

What will happen today?

Last night the foreign markets were down. London was down 0.87%, Paris down 1.65% and Frankfurt down 1.46%. China was up 0.22%, Japan down 0.49% and Hang Sang down 0.27%.

The Dow should open nominally higher. FRB Chair Powell is making prepared remarks and may offer fresh clues on the economic outlook. The 10-year is up 7/32 to yield 0.67%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.