Things Are Not Always as They Appear

There is an old saying about Wall Street prognosticators: Often Wrong, Never in Doubt. The first problem with prognostications is that they are typically very short-term oriented. The second problem is that they often hide counterintuitive facts. The third problem is they contain their own behavioral biases.

Since the beginning of the pandemic, watching the media coverage of the stock market could make it very easy to conclude that growth/technology stocks have essentially been the only game in town. The media has even given it a series of names: FAANG, comprised of Facebook, (now Meta – META), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG), and most recently ‘The Magnificent 7’, comprised of Alphabet, Amazon, Apple, Meta, Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA). There is even a Magnificent 7 ETF! But a boring old ETF that tracks the equally weighted S&P 500 index, rather than market cap weighted, has performed almost exactly as well since the market turned in March of 2020. In fact, it has performed slightly better!

You might think that this is some cherry-picked data and by choosing the market bottom of 2020 as a start date, that has somehow influenced the results. If you did, you would be incorrect. Here is the same chart going back to January 2006. This includes the run up to the housing crisis, the 2008 crash, the recovery, the pandemic, and the recent AI surge. In this case, the S&P 500 equal weight index fund actually performs meaningfully better than the ‘market’ as defined by the S&P 500 market cap weighted index.

If that’s the case, has this whole technology boom been a mirage? Not exactly. Over the past 14 months plus a few days, the S&P 500 Index has vastly outperformed the Equal Weight S&P 500 Index. No doubt this has to do with the change in growth expectations for the mega technology stocks due to the introduction of AI. But even with the massive short-term out-performance, it still has not caught up over the longer term time frame.

We think there are some important lessons here:

• Strong performance doesn’t have to be trendy.
• You can’t time markets. It is important (and fun) to be involved with technology waves, like we are in now. Over the long run, it won’t matter very much whether you started a little early or a little late in these waves, but these technology waves can be very strong, multi-year events. You don’t want to miss them completely.
• Sticking to the plan works. Turn off those talking heads on TV telling you to buy this or sell that. Sit back, sing a chorus of Hakuna Matata, and enjoy the ride. It will certainly get bouncy and a bit scary from time to time, but strong companies will tend to add value over time. That matters because you don’t own stocks, you own companies.

Have a great week!

What we’re reading

US House to vote next week on TikTok crackdown bill

Bitcoin breaks $70,000 in volatile trading, hitting a new record to end the week

After Biden praises progress on inflation in State of the Union, economists weigh in

U.S. job growth totaled 275,000 in February but unemployment rate rose to 3.9%

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The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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By: thinkhouse