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The Market
I always used to give the same advice when someone asked me about investment. I told them to buy the S&P 500, hold it, and go enjoy their life. If you do not like investing and have the time to dedicate to it, you would have been hard-pressed to beat this strategy over the very long term.
But today the market is in a unique spot that has not happened since the early 1980’s.
Currently, the top 5 holdings in the S&P 500 index make up almost 20% of the index. They are Apple, Microsoft, Amazon, Alphabet, and Tesla. These companies have everything going for them. They are tremendously profitable, sell what people want, and have huge competitive advantages.
These companies have also grown so large that it’s unclear where they can go from here. For example, take a look at Apple. Let’s assume it can continue to grow its earnings at 8% a year for the next ten years, a tremendous feat, and apply its longer-term average PE multiple of 14. That gets us to a stock price of $150 a share ten years from now. That is seventeen percent below its all-time high earlier this year. It should not be a surprise if Apple does not reach its highest stock price in the next decade.
It will take time for new leaders to grow and replace these behemoths, or at least even out the index to more traditional levels. That transition may make the index look like a long-term sideways market but will in fact have many opportunities. Indexes are great but there are other indexes out there not so heavily weighted towards big mega-cap tech that led the past cycle. Are smaller cap active managers finally going to get their day? I think the next 10 years will show just that.
Our Holdings
As of the writing of this newsletter, FBG Capital is less than 1% invested. The market needs time to adjust to persistent inflation with higher interest rates. There are no signs the market has its feet under it yet, and putting capital to work right now is needlessly risky. I remain vigilant and can deploy money very rapidly when things change.
Looking Forward
Per my last article, the market is playing out as anticipated. The market rose about 12% since I wrote the article and then sold off again to new lows. It looks like it will do another short-term rally and continue its decline over the next few months. I am also starting to see negative sentiment filter into private business decisions. To me, that marks the end of the beginning of this bear market. I hope I am wrong, but I think there is still a lot of time left to flush this market out and start anew.