It’s all fun and gains for a handful of stocks this year, but for the rest, it’s been tough. If you’re not a “FAANG” company (Facebook, Amazon, Apple, Netflix, or Google), or a company that’s blazing a path in the new COVID world, like Zoom or Docusign, the stock market has not been kind. The average stock is down approximately -10% since January 1.
This morning I saw the top five stocks in the S&P 500 – FAAMG (remove Netflix and add Microsoft) – now represent 25% of the S&P 500. This is the highest since 1965, during the era of General Motors, Exxon , Ford, General Electric and Mobil.
Goldman Sachs saw this happening at the end of April (article here) when the top five represented 20%. They had these takeaways:
- The stock market has been propped up by a handful of mega-cap companies leading into the coronavirus pandemic.
- The five largest stocks now account for 20% (now 25%) of the S&P 500 market cap, exceeding the 18% concentration level reached during the dot-com bubble.
- Historically, such narrow breadth is a poor signal for future market returns, Goldman Sachs said.
Two things are likely to happen from here: either the poor performing stocks will catch upto the high fliers, or the high fliers will catch down to the poor performers. In similar situations in the past, like 1965 or 1999, it’s been the latter.
Portfolios
In our portfolios we’ve been trimming these high growth positions as they go up, thinking they will come down at some point in the future. Unfortunately, after every sale, they climb to new highs and we feel foolish for selling but happy we booked some profits.
For the time being, we’ll maintain our more conservative positioning as we wait for the next shoe to drop. Here are a few items that could determine the future direction of all of our accounts:
- COVID-19 daily death rates jump up, OR death rates stay low
- Effective vaccine distribution in the next year, OR vaccine takes longer/no vaccine
- Democratic sweep in November, OR Republicans hold on
- Surprising recovery in corporate earnings, OR surprising deterioration in earnings
Fund Portfolio
Last month we sold First Trust Internet Fund FDN for a nice double-digit gain that we bought in the heat of the crisis in March. We moved that cash to a short-term bond fund to wait for another opportunity to invest in it again.
Growth Stock Portfolio
In the last few months, we’ve made a few changes to this portfolio. We trimmed high flier Mercadolibre (MELI) to lock in gains and trimmed the underperforming Grand Canyon Education (LOPE) to generate cash to buy Target (TGT), again. We owned TGT for five weeks in the spring for a quick gain. Finally today, we’re pairing back our position in Zoom (ZM), that we bought May 1 for almost half its current price.
We hope everyone is safe and sound and we look forward to talking soon. Until then, please let us know if we can do anything for you.
– Bruce Porter & Tim Porter, CFP®
