by Joe Herrle, CFA, CAIA
Vice President Alternative Assets
According to headlines and news pundits, it is a near certainty that the U.S. is very close to entering a recession (reminder: economists have successfully predicted nine of the last five recessions). Despite this, to date, the S&P 500 has posted a positive return of about 9% this year. The S&P 500 index is comprised of the 500 largest U.S. companies, accounts for almost $35 trillion (yes, with a “T”) in market value and makes up roughly 41% of the entire world’s public equities market. So, when one sees that the index is up 9% on the year, it would be reasonable to think most stocks, on average, are doing quite well. But you would be wrong.
Right now, we are experiencing one of the narrowest stock market rallies in history – narrow, meaning a few select companies are carrying the rest of the index on their back to positive return territory. And, of the 4,266 publicly traded companies in the U.S., the lion’s share of the work is being done by just six companies: Apple, Microsoft, Google, Amazon, Nvidia and Meta. To pay homage to the “Nifty Fifty” of the ‘60s and ‘70s, we shall dub this group the “Slick Six.”
With the fear of a recession on the horizon, this year’s biggest theme has been a flight to quality, particularly large-cap tech companies. And the six companies mentioned above are some of the highest-quality companies in the world. The rush to own the Slick Six is so pronounced that if you equally weighted them in a portfolio at the beginning of the year, they would have generated a return of 49.3% through April 30. The S&P 500 returned 8.8% over the same period. The Slick Six account for almost 80% of market returns this year through April 30.
Like these six workhorses of the market today, the Nifty Fifty of the 1970s were the hot stocks that led the market. The Nifty Fifty was a group of the high-quality stocks of the day and included names such as Procter & Gamble, Coca-Cola, McDonald’s, IBM and Disney. These stocks were considered a bargain at any price, with their valuation multiples far exceeding the rest of the market.
Similar to today, the ‘70s were marked by high inflation and an uncertain growth outlook. Furthermore, just like the Slick Six, the rise in the Nifty Fifty was mostly driven by a flight to quality growth names due to an unclear economic backdrop. But great companies don’t always make great investments. From 1972 to 1974, the S&P 500 lost 36% of its value. The Nifty Fifty lost 50%.
Now there are some obvious differences comparing the Nifty Fifty of the ‘70s and the Slick Six of today, and we are not implying that markets are headed for a massive drop like in the 1973-1975 recession. However, lessons learned from that era are particularly relevant today as valuations remain elevated: fundamentals and valuations matter in the long run, and no stock is a bargain at any price.
Takeaways for the Week:
The number of companies participating in the rally this year is atypically low as investors seek shelter in large-cap tech companies
All eyes are on the debt ceiling negotiations, as a deal must be reached next week to avoid a U.S. default in early June
Federal Reserve officials indicated this week that the decision to raise rates at the June 13-14 meeting would be a close call