Billionaire Howard Marks tells a great story about joining the investment research department at Citibank for a summer job in 1968 when the Nifty 50 stocks were all the rage trading at as much as 80 times earnings.
Xerox, Kodak, and Polaroid, among them.
Marks, co-founder co-Chairman, Oaktree Capital Management (majority owned by Brookfield Asset Management), watched over the next five years as these seemingly infallible companies lost as much as 80-to-90 per cent of their value as inflation surged.
Now, the so-called Nifty Five (Apple, Microsoft, Amazon, Alphabet, and Nvidia for argument’s sake), account for the bulk of the gains in the major stock indices and are trading at rich multiples.
Could that change over time?
It would be odd if it didn’t.
Louis-Vincent Gave is the co-founder & CEO of independent investment research company Gavekal Research.
Here’s what he believes could in store for the Nifty Five.
by Mark Dittli, The Market NZZ
What signals do you read in the equity market?
On the face of it, the equity market is doing fine. The S&P 500 has hit new all time highs. But The Russell 2000 Growth Index didn’t get anywhere last year. We have seen a massive dispersion in the market.
If you owned the top ten stocks, like Google, Microsoft or Nvidia, you have done awesomely. But at the same time, we have 35% of Nasdaq stocks that are down 50% or more from their recent highs.
Under the surface, more and more stocks are rolling over hard.
It feels a lot like the early 1970s, when we had the Nifty Fifty stocks:
The broad market was being held up by around 50 large cap stocks, like IBM or Xerox.
These companies were seen as the best of the best, they were not being impacted by inflation because of their pricing power, and every money manager sheltered there.
Their valuations rose to crazy levels. In the end, the rise in labor costs broke their back and the bubble burst.
Are we back in a Nifty Fifty type market?
Today, we don’t have the Nifty Fifty, we have the Nifty Ten. Nvidia, Google, Apple, and so on. It’s much more concentrated.
And now what we are starting to see is that some of them are rolling over, think Tesla or Salesforce or Netflix, and we have gone from the Nifty Ten to the Nifty Five.
The bottom line is we see a very strong deterioration of market breadth. It’s looking pretty darn menacing.
What does that tell you?
Let me put it to you like this, as we have just celebrated new year’s:
Before COVID, you would have been invited to different parties. Small cap stocks are like being invited to an intimate dinner for four. If it sucks, you are stuck there. You can’t leave.
Apple, Google or Microsoft on the other hand are like your 200 people parties. You can go and drink your champagne, and when you get bored, you can leave and nobody would notice.
This is the difference between small caps and large caps: Small caps take conviction. You would think twice about accepting an intimate dinner with a couple you don’t know very well.
The fact that small caps are rolling over shows a lack of conviction in the market.
The fact that everybody is clustering in Google or Microsoft tells me that people want to be invested, but they want to be able to get out at any time.
Why is this happening now?
Let’s start with the fact that deteriorating market breadth is never a good sign. But I don’t know the reason. Is it Omicron? Is it fear of Fed tightening to the point of a policy mistake?
Or could it simply be that a lot of these stocks have gone up too far, too fast on the back of massive money supply growth? This, to me, is the most probable explanation.
Now liquidity supply slows, and these stocks fall. It’s just gravity. You see this phenomenon of deteriorating market breadth in the US, but you don’t see it as much in Europe or in Japan.
So maybe it’s the start of a global rotation, moving away from the US.
What about US tech stocks?
It gets really difficult there. There are some growth names that have been beaten up but still have good franchises, think of Paypal as an example. So you could try and go fishing there.
Or you choose the crowd in the Nifty Five, the Microsofts and Apples. I just worry that those stocks are now so over-owned and crowded.
It all depends on my Fed call: If the Fed pivots to a dovish stance again, you can keep owning them.
But if I am wrong, if the Fed does turn out to be hawkish, and if they do want to put the inflation genie back in the bottle, the Nifty Five will get crushed.
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