I recently wrote the concerns over the majority of stock indices gains were coming from just a handful of names was not only overstated but actually somewhat inaccurate.
Yes, the large cap technology issues are garnering a large share of investment dollars and do account a large percentage of the indices gains; that is the very nature of cap weighted index and how money managers that need to track those benchmarks allocate their assets.
But as shown, there are plenty of other stocks racking up solid double digit gains and the overall breadth of the market is healthy. At least that’s what I thought.
Not so fast, says Zerohedge in this article. Here’s their take:
The internal workings of global stock markets are giving a flashing red signal. Cheaply priced stocks have been underperforming richly priced stocks for most of the past 10 years, but the predilection for high flyers has intensified sharply in the past eighteen months.
The phenomenon is particularly noticeable in the US and Asian markets, excluding Japan, because of the enormous scale of the Faangs, (Facebook, Apple, Amazon, Netflix, Google) and “Bats” (Baidu, Alibaba, Tencent, Samsung) that dominate their market capitalisation. On some measures the gap between unloved value stocks and hot growth ones matches the excesses of the peak of the internet bubble in 2000.
Why is this happening? Not because stock markets are becoming more efficient and the value factor has been competed out; if that were the case, the result would be a trendless “random walk” rather than an increasingly precipitous decline in the relative performance of value stocks.
Rather, such polarisation is typical of a very late stage bull market. Average stocks of average companies are being shunned in favour of an elite group of stocks that appear immune to economic headwinds and competitive pressures. This narrowing of focus is never healthy, especially when the ascent of the chosen few becomes parabolic as investors grow increasingly worried about everything else.
MSCI indices of value and growth, which use the single metric of price book value, shows the degree to which the latter has outperformed. It is sometimes argued that book value is no longer meaningful in a world in which companies are increasingly reliant on intellectual property and brand value.
Intuitively, that seems possible, but if off-balance sheet assets were indeed making a greater contribution to profits, there should be a structural rise in return on equity. No such rise is visible in either the US or ex-Japan Asia. Indeed, the RoE of the S&P 500 remains well below previous cyclical highs, despite the vast amount of equity that has been retired through share buybacks.
Needless to say, there are significant differences between the investment environment at the turn of the century and now. Back then the internet was new and investors had to grapple with a large number of companies with vague and untested business models. Many of the “dotcoms” became “dot bombs”, a few survived and an even smaller number prospered. Of the Faangs and Bats, few were listed companies at the time and some had not even been founded.
Continue Reading Here.