The Big Picture

An object in motion tends to stay in motion unless acted upon by an outside force.”  -Sir Isaac Newton, Laws of Motion

Isaac Newton lived in the 17th and 18th century. He was one of the most influential scientists and mathematicians to have ever lived. If you haven’t heard of Newton, you are likely aware of the laws of gravity. He spent quite a bit of time on that.

Was Newton a financier or practitioner of investing in the markets? Not particularly. That said, it is funny how the studies of certain disciplines can so closely relate to others. Objects in motion such as stock prices tend to stay moving in the same direction! A bull market in motion of making new high after new high tends to continue to do so until an event acts upon it. It takes a catalyst to start a rally, and it takes a catalyst to end one.

Momentum measures the quantity of motion. Market momentum can be an exceptionally powerful force. It is important to understand the relationship of market momentum to the underlying data. The most popular names, not surprisingly, tend to have the highest momentum.

Have a Plan and a Process!

From the Trenches

I can calculate the motion of heavenly bodies but not the madness of people.” -Sir Isaac Newton

Have you heard of the “FAANG?”

Facebook, Apple, Amazon, Netflix, and Google. These names have been market leaders as well as the some of the most popular stocks to own for some time. Momentum and popularity tend to go hand in hand. There are some additional names that could be added to this list as well. Momentum has nearly become an investment style of its own.

As of the writing of this post. Facebook is outperforming the S&P 500 by nearly 30% and leading the pack of “FAANG’s” (Bloomberg). All of the “FAANG” stocks are outperforming the S&P 500. In fact, if you removed the “FAANG” from the index the year-to-date performance would drop by nearly half (Bespoke).

What do you own if you are invested in the S&P 500?  You own the largest 500 publicly traded companies by market capitalization in the United States. The S&P 500 index is also weighted by capitalization. This means the bigger the company, the larger the proportion in the index. The total value of the S&P 500 is approximately $22.5 trillion. The top ten names make up $4.6 trillion of that value. Four out of the five “FAANG” stocks are in the top ten (sorry Netflix, number 69 in size). The top 25 names make up $7.8 trillion (Morningstar).

What does this imply?  The top ten stocks make up 20% of the S&P 500. The top 25 make up 34%, or roughly a third. This means that the other 475 stocks in the S&P 500 share the remaining two thirds of the index. Big can be really big! Simply the understanding that a relatively few companies in the index have the most influence and at times will carry the index.

Is this normal? It is. Especially the later we are in the market cycle. However, herein lies the rub!  When momentum takes over and investors are willing to own the popular names at any price, a separation between intrinsic value and price becomes increasingly more evident. This can get out of control, and you will hear cries of overvaluations, and even the bubble word! We all know where that can lead.

Bottom line: Momentum is great fun on the way up. Not so much on the way down! Like musical chairs, you do not want to be the last one without a chair when the momentum-music stops. Have a process for this risk. 

Never mistake Motion for Action.” -Ernest Hemingway

Market Update

We are over half of the way through earnings season. To date, S&P 500 earnings are up approximately 10.6% and sales are up 6% year over year. In the NASDAQ, earnings are up 13.6% and sales up 10.7% (Bloomberg). We are heading in the right direction. This will mark the 4th quarter of meaningful acceleration to the upside since the low in earnings and sales in early 2016.

Economic data continues to strengthen with meaningful measures to the upside. Consumer confidence, which is generally seen as a leading indicator to economic activity, is hitting highs not seen since the last market cycle (See below).

After roughly two years of stagnant confidence, we are at highs for this cycle.

Bottom Line: The data is the data. Try not to let opinions and agendas obscure the underlying facts. Economic data is improving.