You don’t have to get very far down the leaderboard to understand what has propelled the rally in U.S. equities this year. The top seven names, in fact, pretty much tell the whole story.
The so-called magnificent seven stocks were responsible for practically all of the gains in the S&P 500 index through the first half of the year. Widen the lens out to the entire world, and roughly 70 per cent of the net wealth created by stock markets globally was driven by this handful of tech behemoths.
To call the magnificent seven stocks dominant is an understatement. Apple Inc. AAPL-Q alone has a market capitalization of US$2.8-trillion, which is larger than the entire S&P/TSX Composite Index. Takewhat is encompassed in the Canadian benchmark – the big banks, the vast oil and gas sector, the mining and metals complex, the rails and telecoms, the tech and consumer industries – andall of it combined is dwarfed by the omnipresent smartphone company.
Factor in the other stocks at the top of the U.S. market – Microsoft Corp. MSFT-Q, Alphabet Inc. GOOG-NE, Amazon.com Inc. AMZN-Q, Nvidia Corp. NVDA-Q, Meta Platforms Inc. META-Q and Tesla Inc. TSLA-Q – and together they comprise about 28 per cent of the S&P 500.
If you’re a stock picker, almost nothing else matters right now than this tiny basket of huge stocks. Active managers of U.S. stock portfolios have seen their performance against the market largely reduced to their calls on the magnificent seven.
How can any investor expect to have an edge over the rest of the market when it comes to these stocks? After all, they are some of the most-watched and heavily traded equities on the planet. Not to mention the fact that these are highly correlated names that tend to move up and down in unison.
In investing, as in life, if you can’t beat ‘em, join ‘em. This is the basic idea behind passive investing. A diversified index fund lets you essentially buy into the entire market without having to pick the winners.
This year makes an unusually strong case for a broad index approach, which may seem counterintuitive. Why would you want to be forced to own legions of losing stocks when the market rally is so heavily concentrated in a small core of elite names?
This is why the investors and funds that gravitate toward a passive approach are sometimes collectively disparaged as “dumb money.” It doesn’t pretend to have insight into how to beat the market. And it isn’t directed by any conviction about the probable future returns of any one company versus its competition. It simply seeks the benefit of diversified, low-cost exposure to the entire economy, or at least the close approximation of the economy represented by the stock market.
A common criticism of passive investing is that it’s inflexible. You may end up highly concentrated in the best performing sectors. And you are essentially forced to buy high. An index like the S&P 500 is weighted by market capitalization, meaning each company’s share of the index is tied to its valuation. It follows that overvalued companies have larger weightings in the index than they should. The larger the weighting, the more passive money flows to that stock.
Passive investing may be “dumb” in a literal sense. But it is also the only way to ensure that you will always own the hottest stocks of the moment. That arguably outweighs the downside of an index fund strategy.
The performance of the magnificent seven this year is an extreme example of narrow leadership. But it isn’t as much of an anomaly as you might think.
The stock market has proven itself over the decades to be a compounding machine. In the case of the S&P 500, the average return has been roughly 10 per cent per year dating back nearly a century. The average stock, on the other hand, has a much different track record.
Research by Hendrik Bessembinder, a finance professor at Arizona State University, has shown that most stocks fail to outperform Treasury bills. Looking at returns for more than 64,000 common stocks from 1990 to 2020, 55 per cent of U.S. stocks and 57 per cent of non-U.S. stocks fell short of the return on one-month Treasuries over their lifetimes.
What’s more, a remarkably thin subset of market leaders has proven responsible for delivering the returns that investors have come to rely on. Over that same 30-year timeframe, stock markets globally generated roughly US$75-trillion in wealth. Half of that wealth was created by the best-performing 0.25 per cent of firms, or one in 400. And the top 2.4 per cent of stocks accounted for all of the net global wealth creation.
The research highlighted the long odds facing stock pickers. Can you consistently identify the tiny minority of stocks that will fuel the entire market? Can you find the needle in the haystack? Or, to paraphrase the index-investing pioneer Jack Bogle, should you just buy the haystack?
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
