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How Not To Time The Market
I've been on about so-called "concentration risk" in US equities. Everyone has.
The discussion isn't particularly complicated, but in its current manifestation, it admits of more nuance over time.
US equity benchmarks are dominated by a few heavily-weighted tech titans, on whose shoulders the burden of the rally disproportionately rests. In addition to being the best companies in the world on a variety of key metrics, the FAAMG cohort has benefited immensely from the "slow-flation" macro regim
As far as I was already concerned, indices like the S&P500 are fully capable of tanking 10% or more in a short space of time, with or without the top stocks being overly index heavy. Today’s post now provided the other piece on why I shouldn’t care about index concentration at current levels, given its apparent lack of predictive quality. Once again, thank you for illuminating things that aren’t what they are ascribed.
The interesting thing is the S&P 494 earnings are maybe 60% higher than in 2008. Less than a 4% annual growth rate.
H-Man, a very good note. Many factors = ?.
As Immanuel Wallerstein reminds us, in a totally free market, “it would always be possible for the buyers to bargain down the sellers to an absolutely minuscule level of profit and this low level of profit would make the capitalist game entirely uninteresting to producers, removing the basic social underpinning of such a system.”
That’s not actually correct. AFAIR, in a perfect free market (perfect competition, perfect information), you get profit levels in line with the risks taken. So, sure, uber safe businesses would indeed afford their owners very small profit margins. But risky enterprises would still attract hefty margins. They’d just go bankrupt with far greater frequency.
And, while, we are not a perfect free market by any stretch of the imagination, the above generally hold relatively true – for the old economy. Indeed, it’s the very capacity of the FAAMGs to escape those traditional constraints around size, growth and profit margins that make them so very unique.