It’s Nvidia’s world and we’re living in it (if you believe the stock market). The S&P 500 (and Nvidia) recorded all new highs post the AI chip maker’s earnings. Be careful paying too much. The rapid rise in Nvidia’s market cap has only seen the market narrow further. And from mine, that makes it more subject to both volatility and risk. Deutsche Bank’s Jim Reid dimensioned the risk another way. He shows how the Top 10% of stocks in the S&P 500 constitute ~75% of the total capitalization. We have not seen that since 1929! The only other time we saw something similar was the dot.com bubble…
"Asset Allocation"
Mean Reversion: Index Risks & the ‘M7’
In the game of asset speculation – mean reversion suggests that over time an asset will eventually return to its average price if it drifts or spikes too far from that average level. If applied, it can often help you avoid paying too much. My thinking is the S&P 500 has now drifted too far from the longer-term mean. History has always told us that inevitably prices will mean revert. This post explores the potential risks to investors if simply choosing to passively invest via the benchmark Index. Look no further than the so-called “Mag 7” – which constitute more than a 30% weight.
Equal Weight ETF to see Mean Reversion
The euphoria in markets continued last week – with the S&P 500 notching a new record high – taking out the 4817 high from Jan 2022. Thanks largely to the Fed signaling peak rates in combination with inflation trending lower – markets now believe a ‘soft landing’ is possible. That is, inflation ultimately trends back to the Fed’s objective (2.0%) without any negative impact to the broader economy (e.g. widespread job losses). We will see how that turns out – as the Fed is attempting to thread a narrow needle. From mine, a soft landing remains a lower probability outcome. However, I believe there is still opportunity… and it’s not with large cap tech stock.
Investors Start Weighing the Risks
Investors have hit pause on equities – evaluating a new set of risks. For example, the S&P 500 is now trading close to the same level it was at the end of January. 8 months of gains gone! The world’s largest index is up ~10% year to date… losing 2.4% this week. When you consider the S&P 500 lost ~19% last year…. it has not been a good two years. This post looks at why the outlook has deteriorated with 4 key charts: (i) 10-year yield; (ii) 10-2 yield curve; (iii) VIX; and (iv) gold – which touched $2,000 this week. What does it all mean?
For a full list of posts from 2017…