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7am Saturday

January 25, 2020

Hey friends!

Greetings from Findlay, Ohio! I hope you had a great week. Mine was not a typical week for me, so the resource list is a bit short this week. My wife was out of town, and I was a single dad with sick kids for most of the past week. Needless to say, I’m glad she’s back! Parenting is definitely easier as a team. Big props to all of you single parents out there. I couldn’t do what you do!

Markets

U.S. markets finished the week lower with most of this week’s decline occurring on Friday:

Although the markets closed lower for the week, they are still in overbought territory and within their uptrend channel.

With the great run of new highs we’ve had over recent weeks it’s no surprise that the market has cooled off a bit. In fact, this type of decline is welcome occassionaly to bring the indices down to their normal averages. As you can see, all three major indices are still trading above their 50 day moving averages:

The coronavirus is already affecting China in a big way. This week, stocks were hit the hardest in Asia and the emerging markets. This isn’t the first time we’ve seen a virus or health scare impact the markets. Remember ebola, the swine flu, and the zika viruses? The thing to remember is that these events are temporary and eventually pass. The temptation as investors might be to sell or abandon your long-term investment plan. Especially when you hear that 33 million people in China have been restricted from moving about freely. However, the fact is that in past instances these events actually created buying opportunities for investors.

Bottom-line: don’t let this week’s news change your investment plan.

Tech is Leading the Way

Remember last week’s email when I mentioned Brian Wesbury’s outlook for the economy and market? He mentioned that a “tsunami of technology” is driving the economy.

He’s right. The companies that are the most productive, profitable, and with the highest growth rates are generally within the tech sector.

As a result, the technology sector is now the most significant portion of the market:

Technology’s weight in the S&P 500 is now 24.2%, which is over 10% larger than Health Care — the next biggest sector. Tech’s weight is also bigger than the five smallest sectors combined!

Since the end of 2018, Tech’s weighting in the S&P has increased more than 4%, while no other sector has seen an increase of more than 0.38%:

So, what’s the point? Well, most importantly you should know your exposure. Investing in Tech has worked out exceptionally well over the past decade as the Tech sector is now up 700% since its 2009 low. While the trend is your friend and bull markets don’t die of old age, things are starting to get stretched for the US Technology sector, whose chart appears to have gone parabolic over the last few years.

Consider this: If you’re invested in US index funds, you’ve got a lot of tech exposure. If Tech starts to sell off, it will cause pain for investors both large and small, causing market outflows. Keep in mind that momentum to the downside is usually much stronger than momentum to the upside.

So, know what you own. There’s nothing wrong with holding a healthy allocation to Tech companies as I firmly believe they will continue to lead innovation in our economy. In fact, many companies in other sectors are now becoming Tech companies in their own way as many companies are figuring out how to use technology to create a competivive advantage. Just don’t get married to Tech as many investors did during the late 90’s Tech bubble. Stay diversified and don’t be afraid to trim your positions as they become more and more unbalanced.

One final point on valuations: Tech is trading at 28X trailing earnings while the S&P 500 is trading at 22X. So, tech is trading at a premium as it should due to the increased growth potential. But, valuations should be monitored closely at this point. Let’s hope we don’t see a 50X+ P/E ratio like we did in the late 90s!

The Top 5 Stocks

Last week I wrote about the $1 Trillion Club. This week, let’s expand that a bit and look at the top 5 stocks of the S&P 500.

2020 began with the market caps of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), and Facebook (FB) totaling 17.3% of the S&P 500’s total market cap:

Since 1990, that is the largest percentage that has been taken up by the top five stocks at the start of the year.

The only other year with the top five stocks holding a comparably high weighting was 2000 when it was 17%. That year, the five stocks that held the highest share of total S&P 500 market cap were Microsoft (MSFT), General Electric (GE), Cisco (CSCO), Walmart (WMT), and Intel (INTC).

While MSFT is the only one to have stayed on this list for all but one year (2001) since then, GE currently has fallen to the 66th largest stock in the index, CSCO the 27th, WMT is the 10th largest, and INTC is the 18th largest.

The market cap of the top five stocks in the S&P 500 as a percentage of total market cap exceeding even the prior record from 2000 should raise concerns. As was the case in 2000, if/when those top five stocks start to unravel they have the potential to take the entire market down with them.

One key difference between now and 2000, though, is that the five largest stocks in the S&P 500 are nowhere nearly as stretched on a valuation basis to the rest of the market.

• Today, the five largest stocks in the S&P 500 have an average P/E of 27.80 compared to an average of 22.26 for the rest of the market.
• That premium of the five largest stocks is not insignificant, but compared to the average P/E of 56.84x of the top five stocks in 2000 it’s nothing.

A Podcast & A Blog Post

+ Dividend Investing For Dummies (The Invested Dads) – No, I’m not calling you a dummie!🤣 But, I do think you should listen to what Josh and Austin have to say about dividend investing.

+ HELP! How Do I Claim Social Security Benefits? (The Everyday Advisor) – Jess has some tips if you or someone you know will be applying for Social Security benefits soon.

Cheers,

Adam

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