When the supply of money expands – it’s typically very good for stocks. For example, the S&P 500 index is said to appreciate at an average annualized pace of 14.02% when liquidity expands. However, when it contracts, that gain was only around 7.0%. Today money supply is once again expanding after one of the largest contractions in recent history. This has the potential to be very good for investors. As they say, it’s always easier swimming with the tide.
Something Doesn’t Add Up…
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…
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.
Three Cheers for 5,000!
This week the S&P 500 closed above 5,000 for the first time. Another milestone as we climb the ‘wall of worry’. Over the past 100+ years the S&P 500 has averaged capital gains of ~8.5% per year plus dividends of ~2.0%. That’s a total return of close to 10.5% (on average). If you compound 10.5% per year over 20 years (i.e., ‘CAGR’) – that’s a 637% increase. But as we know, the pathway is rarely smooth. Some years the market may “add 20%” and others it could give back a similar margin (or worse). And we saw this happen recently. However over the long run – markets will rise more often than they fall.
For a full list of posts from 2017…