Three weeks into January and the squad is firing on all cylinders. Three things you can learn this week courtesy of Nick, Michael and Ben:
You will often hear that there is something wrong or artificial about the current secular bull market because of the relatively high concentration of the FAAMG stocks – Facebook, Apple, Amazon, Microsoft and Google. Three of the five have attained trillion dollar market caps and the other two are getting closer every week. The five largest stocks now represent a hefty percentage of the S&P 500’s market cap. But it turns out that this is not a very unusual situation. It happened during the 1990’s secular bull market and the 1960’s secular bull market. There are always market leading stocks. For a quick history lesson, do not miss Nick Maggiulli’s newest one:
Michael notes that a lot of people are now talking about the need to accept lower returns for a diversified portfolio going forward. The US stock market now sells for a valuation that had historically led to lower than average forward returns over the ensuing 10 year period. As far as bonds, it’s unlikely that total returns will drastically exceed the current yield of a ten-year Treasury on an average annual basis. So what is an investor to do? He’s got some ideas…
Finally, Ben took a look at the historical returns for the stock market following great years (like 2019) or poor years (like 2018) and has determined, using data, that there is absolutely no investable signal there. Whether a prior year features an up market, down market, or even a double-digit move in either direction, this information tells you nothing about what could happen this year. Trust no narrative that emphatically states otherwise. Here’s the proof:
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