The Stock Market Is Near Correction Levels
Stock market
XINHUA NEWS AGENCY/GETTY IMAGES
What if I told you the fastest stock market recovery in history is just about a misunderstanding?
You’ve probably seen headlines like this one:
Headline about stock market in media
DAN RUNKEVICIUS
Or this one:
Headline about stocks in media
DAN RUNKEVICIUS
Doesn’t it seem off that the stock market is blazing past record highs while the economy is in freefall? And at the same time a record 50 million Americans are sitting around without a job?
It should. Because all the fuss about the stock market’s comeback comes down to a misinterpreted term.
As I’ll show, what all these headlines refer to is no longer the stock market as we know it. Most stocks have a long way to full recovery. And this confusion puts a lot of investors at risk without their even realizing it.
What is the “stock market” after all?
When you hear words like “the stock market” or “stocks” in the media, they are not referring to every single stock in America. They are usually referring to the S&P 500 (SPX).
The S&P 500 is an index that tracks the performance of America’s 500 biggest companies. The index contains 75% of all American stocks and is considered the key gauge of the overall market.
This term is so prevalent it has become a synonym for the entire stock market. That’s why people mindlessly throw it around when they talk about stocks.
So let’s take a quick look at how the index arrives at the figure you see in the headlines.
In short, the index calculates the total performance of all the 505 stocks it includes. But it’s not as simple as adding up the growth percentages and dividing by 505.
Each stock in the index carries a “weight” based on its company’s size (known as market cap). The “heavier” the stock, the more its performance affects the index. For example, Apple AAPL , with its market cap of $1.7 trillion, has a 5.3X higher impact on the index performance than does Visa V with its $0.325 trillion.
This formula is supposed to give us an accurate picture of how America’s entire stock market is doing. Problem is, it doesn’t work today.
The S&P 500 no longer represents the stock market
The 505 stocks in the index come from a range of sectors that used to have a proportionate weight in the index. From 2001 to 2019, the breakdown by sector looked more or less like this:
S&P 500 composition from 2001 to 2019
MEANWHILE IN MARKETS…
But that’s no longer the case. During the pandemic, investors flocked to tech in droves and tech stocks hijacked the S&P 500 big time—as you can see below:
S&P 500 composition in 2020
MEANWHILE IN MARKETS…
Today they make up over than 27.5% of the benchmark index. But if you add in Google (GOOGL), Amazon AMZN, and Netflix NFLX—stocks that aren’t labeled as tech stocks in the S&P— the tech’s share in the index swells to a staggering 36.6%.
That’s the highest share of tech stocks in the S&P 500. Ever. Even in 2000 during the dot-com craze, tech stocks didn’t dominate the S&P 500 as they do right now.
Tech was a ballistic force driving the entire S&P 500
This year the S&P 500 soared 50% from its lows, blazing past its record before Covid. That has given investors the wrong impression that the entire stock market is booming. Reality is, most of this growth was driven by tech stocks.
Seven out of the 10 S&P 500 top performers this year are tech stocks, including Nvidia NVDA (88% up), Paypal PYPL (88% up), and Amazon (AMZN) (86% up). Meanwhile, 63% of the stocks in the index are down, according to CNBC.
And because tech stocks have a disproportionately higher weight than the rest of the stocks in the index, their performance has been greatly amplified. This is how tech stocks grew into a ballistic force pushing the entire S&P 500 to a historic record.
Take a look at this chart. It shows where the S&P 500 would be today if we took out communication (Facebook, Google, and Netflix inside) and tech sectors—along with Amazon:
S&P 500 YTD performance without tech
MEANWHILE IN MARKETS…
If it weren’t for tech stocks, the S&P 500 would be down around 8.6% from its highs by my calculations. That’s still near correction territory.
Don’t put your eggs in one tech basket
There are two problems with this.
First, the S&P 500 index gives a lot of investors the impression that America’s stocks are doing better than they are. But they are not.
Second, ETF funds that track the S&P 500 are one of the most popular investments. They are also one of the go-to retirement funds. In other words, there’s a hoard of Americans who are financially reliant on this index.
They are putting their money in the S&P 500 with the belief that they are well diversified. When in reality, more than one third of this money goes to gambling on high-flying tech stocks.
Of course, tech stocks have been a great investment so far. Covid has fast-forwarded a number of tech trends, such as online shopping. And a lot of money changed hands from “offline” stocks to tech stocks.
But this tech boom can’t go on forever. Trillion-dollar stocks nearly doubling in half a year is not a norm by any stretch of imagination. Chances are tech stocks will take a breather somewhere down the line.
And with tech stocks making up a record 37% of the S&P 500, the pullback could drag down the entire index. As such, it would be smart to spread your eggs a bit wider
You could look into classic anti-crisis investments like gold or blue-chip stocks. Another way to limit your reliance on tech stocks is to switch to an ETF fund that tracks the S&P 500 Equal Weight Index.
(The largest ETF of this kind is Invesco S&P 500® Equal Weight ETF [RSP].)
Unlike the standard S&P index fund, this one doesn’t take into account the stock’s weight. That means an ETF fund that tracks it will spread your investment over 505 stocks in equal parts, regardless of weight.
This way, you’ll invest in a more diversified basket of America’s top stocks without banking 37% of your money on tech stocks.
Step up your investing game
Every week, I put out two stories to help explain what’s going on in the markets. Subscribe here to get my analysis and stock picks right into your inbox.
I have worked as an equity and macro analyst in a number of financial research houses including Mauldin Economics, RiskHedge, Hard Assets Alliance, and Garret/Galland
…Read MoreSuccession Problem For Female-Owned Startups: How To Value The Business
Assessing value. (Getty Images)
GETTY
More and more women are starting businesses. But since they are more likely to step away from the business than men, they need to focus early on about naming a successor. And that involves a knotty question: determining what the business is worth. Julie Meissner, chief operating officer at Garrison Point Advisors, in Walnut Creek, Calif., has some insights on what to do:
Larry Light: There has been a large jump in women starting business in recent years. A lot of money is involved, both near and longer term. What aren’t they thinking about as they embark on this path of entrepreneurship?
Julie Meissner: Women in America started new businesses at the rate of about 1,800 per day during 2018–19, according to the State of Women-Owned Businesses Report, compiled by American Express AXP. That’s encouraging news. However, because starting a business is so exciting, most female founders do not stop to think about the scary “what-if” curveballs that life can throw, and specifically what that would mean for their business. A recent study showed that 58% of business owners lack a succession plan, which includes 47% of owners over the age of 65.
Light: Why is this?
Meissner: Female entrepreneurs face unique challenges because they are more likely than their male peers to step away from business for personal and familial reasons. This could include anything from birth of a new child, a personal or family illness, to a sabbatical or educational leave.
In a study conducted by the Harvard Business Review, female business owners were 15% more likely to exit their business for personal reasons—and their probability for failure was 13%. Instead of permanently stepping away from your leadership position, consider if there is anyone in your organization who could step in to help out with the day-to-day if you needed to take an extended leave. Typically, that’s between three and 12 months.
Light: What’s the value of long-term succession planning?
Meissner: In the event of retirement or permanent departure, you want to ensure that your business will not skip a beat. Additionally, it will give you the chance to select your successor, by selling your organization to a third party or to promising female talent in your organization if it’s important for it to continue as a female-owned business.
Selecting a successor ahead of time, ideally at business inception, gives you the ability to help shape the future of your organization if you suddenly or expectedly step away from the business permanently. Below we have highlighted the top components of an effective long-term succession plan.
Light: What options do you have in figuring out the direction of the business?
Meissner: There are many different avenues you can explore when thinking about whom to transition your business to. The most common transitions include selling to a co-owner, a key employee or a third party, or passing ownership interest to a family member.
When choosing which route to take, evaluate if and how soon you will need the capital, whether this was included in your retirement planning, and the capability of your chosen successor to execute on the purchase agreement. Statistics show that approximately 75% of all businesses fail to survive past the first generation of owners, mainly because succession plan options have not been fully explored.
Light: What are the considerations in choosing a successor?
Meissner: If you plan to step away from work for a short period, your substitute may need to fill a different role than the person you would choose for a longer-term solution. While you may be inclined to choose someone who you get along with as a permanent successor, make sure that you select the individual based on the needs of the business as a whole and taking into consideration what deficits will be created by your ultimate departure. Consider their depth of experience, evaluate their strengths and weaknesses, and invest time in training in preparing them for their future leadership position.
Light: Valuing the business is a key part of this. How do you do that?
Meisssner: Over 30% of business owners are not sure what their business is worth. While you do not need to have a specific valuation determined, you should have a pretty good idea as to what your business could potentially sell for. Whether it be creating an agreed-upon sale multiple internally or planning to hire a CPA to appraise your business at the time of sale, it is best practice to have a legal document detailing the specifics of the future succession. Plan to have proper documentation signed with your successor so you are both on the same page.
Light: Once the successor is in place, how do you deal with that person?
Meissner: It is important to talk honestly and often with your successor to make sure that you continue to have shared assumptions and understandings. A succession plan is not necessarily a one-and-done document, because your plans and expectations and those of your successor may change in the future.
To mitigate any future misunderstandings or miscommunications, have recurring check-ins annually with each other to keep the communication channel open. Additionally, you should start to work with your successor to create your exit path three to five years ahead of your expected departure.
While most business owners love running their business and cannot imagine stepping away, if you wait too long to plan for succession, you may not meet your financial goals and may be opening yourself up to unnecessary risk.
Good investing ideas, often contrarian, constitute my brief, here at Forbes.com. Key to that is helping you to build a solid financial future. Sometimes that involves
…Read More
No comments:
Post a Comment