The strong rebound in the S&P 500 may be a phantom as it is concentrated in the top five stocks, reports Landon Whaley.
Today I want to talk about what’s real and what’s not.
I’m hearing a lot of permabull cheerleaders in the media waving their pom-poms and shouting “V-shaped recovery, V-shaped recovery!” Whenever these bring it on wannabes are confronted with the laundry list of worst-ever economic data points flying in the face of the touted “V,” they simply point to the recent rally in the S&P 500 to refute.
Ah, everyone’s favorite equity benchmark, the good ole’ S&P 500. The benchmark by which all money managers are judged, and all cocktail party discussions begin.
For those of you buying the Wall Street-led belief that the S&P 500 is the only economic indicator you need to make profitable, risk-conscious investing decisions, the following insight is just for you.
I’ll be the first to admit that the S&P 500’s 30% rally off the March 23 low is pretty impressive. In fact, it’s the fastest 30% post-crash gain since the Great Depression. While that factoid makes the perma-bulls giddy, those of us that are data-dependent see just another depressionary data point to add to the growing list.
Everyone on Can Never Be Correct is navel-gazing that monster four-week return to the exclusion of every other data point on Earth, but as is usually the case, the devil is in the details.
The S&P 500 index is now more concentrated than at any point in human history, with just five stocks: Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB) accounting for 22% of the index. This level of concentration is critical to understanding that the recent rally is the epitome of fake economic news.
The S&P 500 is trading 16% below its Feb. 19 all-time high. Yet, the average company in the index is currently 28% below its record high. That’s a 1,200 basis point difference between the index and the companies that comprise the index. That delta, which is as wide as the Mississippi, is driven entirely by the concentration in the M.A.A.A.F stocks.
To drive this point home from another angle, the S&P 500 is down just 11.5% for the year. Yet, small-cap and mid-cap stocks are still down 21.9% and 23.1%, respectively, after their own historic rallies off the March bottom.
When just five stocks are forcibly moving an entire equity index, the way Lawrence Taylor used to steamroll offensive lineman, it doesn’t provide an accurate assessment of the overall health of the U.S. stock market. The S&P 500’s concentration in five mega-cap companies is obscuring the U.S. equity market reality and makes its current value fake.
Now, let’s discuss what’s real.
The 30.3 million jobs lost in the last six weeks is real. The fact that the number of mortgage loans in forbearance went from virtually zero to 3 million in four weeks is real.
What’s also real is that the majority of publicly traded companies have withdrawn guidance because they don’t have a clue what’s coming down the pike.
Crude oil losing 300% in a single trading day and sellers paying buyers $37.63 to get rid of each barrel, is real.
Finally, the massive, and growing, list of “worst ever” economic data points, is as real as it gets.
Folks, there is no “V”-shaped recovery in our future. I don’t know what letter of the alphabet the recovery will resemble, but what I do know is that the worst, in terms of both economic data and financial market performance, is in front of us, not behind. Trade accordingly.
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