Nifty Fifty vs Magnificent Seven; U.S. Government/Fed
Changed Stock Market Valuations
By Victor
Sperandeo with the Curmudgeon
Background on Glamour Stocks and the Nifty Fifty:
In April 1971, Victor started Ragnar Option Corp. - an OTC Put and
Call options dealer. Ragnar was the 27th
Put and Call dealer in the U.S. at the time.
Six months later we became the largest dealer in terms of options
volume, according to the Put and Call Dealers Association. We joined the CBOE
when it started in January 1973, bought three seats, and became market makers.
We did 15% of the CBOE volume in our first year and 5% in year two.
The listed options exchange gathered the bulk of speculators business, as
you could easily trade puts and calls with good liquidity vs. OTC options,
which did not have a ready resale market.
An analogy would be Henry Fords automobile business vs. horse and buggy
carriages in the early 20th century.
In 1977, we merged Ragnar into Weeden & Co. the third market
dealer (market maker). Part of the deal
was for Victor to become a trader for Weeden in the Glamour Stocks, aka The
Nifty 50. Those large cap
stocks were also referred to as one
decision stocks, because their prospects were so bright that
analysts claimed that the only direction they could go was up. Buy and hold forever stocks included: Xerox,
IBM, Kodak, Polaroid, Avon Products, Sears Roebuck, McDonalds, and Coca-Cola.
Victor used his knowledge of options to make narrow markets in size (10,000
and up). As a result, Weeden garnered a
great deal of stock flows from institutions. Victor never had a losing month
while he was there. The traders as a whole also never
had a losing month. Unfortunately, Weeden overspent and eventually closed. Its interesting that the U.S. has
overspent much more than any company, but has not gone bankrupt?
In the 1970s and 1980s the business cycle was in effect and real
recessions occurred. The glamour stocks were not immune to recessions. They experienced decreasing earnings and
crashed in the vicious 1973-74 bear market.
Many of those Nifty Fifty stocks no longer exist (e.g. Kodak, Polaroid,
Xerox, Sears, etc.), others are a shadow of their former selves (e.g. IBM, GE,
Avon Products, etc.).
What Happened to Recessions?
It must be stressed that the definition of a recession going back to 1854
was two consecutive declining quarters of GDP (which has nothing to do with
jobs created or unemployment). By
that definition, a recession must last for a minimum of six months of declining
economic activity. Therefore, the U.S. has not had a real recession in 15
years.
Last year, economists and analysts including Victor and the Curmudgeon,
called for a recession in 2023. Despite
record increases in interest rates (percentage terms) there was no recession.
Undeterred, many economists are still forecasting a recession in 2024. The
contrarian view is no recession next year because it is an ELECTION YEAR. We
discussed this at length in a recent
Sperandeo/Curmudgeon post (see Sidebar: Recessions that Start in Election Years).
Victor forecasts trend growth of U.S. GDP at +1 to 2% next year. Remember
there is no U.S. budget cap until
2025 (thanks to Kevin McCarthys great negotiation
expertise). Thereby, U.S. government spending will be open ended and
unchecked in 2024 which will prevent a recession.
..
Contrast with Todays Magnificent Seven:
The Magnificent Seven stocks [1.]
of 2023 are like the glamour stocks of the 1970s. The major difference between
today and the 1970s and 1980s is that real recessions have not occurred
since the last one ended in June 2009.
No professional economist of today would suggest that a recession took
place for only TWO MONTHS (March and April) in 2020 as the NBER claims.
Note 1. The Magnificent Seven is a term
introduced by Bank of America UK analyst Michael Hartnett to describe a
market-leading group of tech-focused stocks: GOOG, AMZN, AAPL, TSLA, NVDA,
META, and MFST. Most of these stocks are valued at or above $1 trillion in
market cap so they are the biggest companies in America (Apple is now over $3
trillion in market value).
Given that the S&P 500 index is a market cap influenced index its
understandable that these seven companies would comprise 30% or more of the
S&P 500 index influence.
..
The Magnificent Seven have
easily outpaced the Nasdaq-100, S&P 500, DJI and Russell 2000 in 2023, with
the group averaging a total return of 95.62% YTD, according to the NASDAQ website. That stupendous advance was primarily due
to P/E expansion-not real earnings growth.
The average of the seven
stocks trade at a P/E of 33.1 times current (2023)
earnings and 27.5 times forward (2024) earnings. Furthermore, EPS growth is expected to
decelerate... to 30%, 14%, and a mere 8% over the next three quarters. Clearly, the Magnificent Seven are priced for
perfection.
These seven stocks have helped
fuel the S&P 500 indexs 19% gain for 2023.
Compare that to the equal weighted index (where each of the 500
companies have an equal 2% contribution to the index) which is up 6% year-to-date. Without their gains, the S&P 500 would be
up less than 10% this year.
Here are the current
individual market cap weightings of Alphabet, Apple, Amazon, Meta, Microsoft,
Nvidia and Tesla. The weightings will, of course, change as their market caps
fluctuate.
|
Company |
Symbol |
Market Cap Weighting (%)* |
|
|
Apple |
(AAPL) |
10.8 |
92 |
|
Microsoft |
(MSFT) |
9.8 |
99 |
|
Alphabet Class C |
(GOOG) |
6.2 |
95 |
|
Alphabet class A |
(GOOGL) |
6.1 |
95 |
|
Amazon.com |
(AMZN) |
5.4 |
91 |
|
Nvidia |
(NVDA) |
4.1 |
98 |
|
Meta Platforms |
(META) |
3 |
99 |
|
Tesla |
(TSLA) |
2.8 |
85 |
|
*As of Dec. 8, 2023 |
|||
Source: Investors Business Daily
..
The Magnificent Seven are different from the Glamour Stocks in that recessions
today are outlawed for political power. These seven stocks are used as
Savings Accounts because they always make money WITHOUT A RECESSION!
What is the first thing companies cut in recessions? Advertising! All those companies, except
NVDA, are negatively impacted by a big decline in advertising revenue.
Like most large cap companies, the Magnificent
Seven boost their share prices by buying back stock which reduces the
supply/float of shares. For comparison
purposes, the Nifty Fifty couldnt do that because share buybacks were illegal
until after the 1981 recession. [Buybacks
were illegal throughout most of the 20th century because they were considered a
form of stock market manipulation. In 1982, the Securities and Exchange
Commission passed rule 10b-18, which created a legal process for share
buybacks.]
U.S. Government and Fed Rules Boosted Stock Prices:
Over the years, we have MANY TIMES discussed other critical changes that
greatly affected the U.S. economy and boosted stock prices. One such example was the 2008 rule that let
the Fed pay interest on bank reserves.
As a result, banks stopped making loans (or sharply decreased lending),
because they got paid interest on reserves without any risk. That led to lower short, intermediate, and long-term
interest rates, which hugely increased the value of stocks via P/E expansion
(stocks compete with fixed interest securities like bills, notes
and bonds).
The Dodd-Frank Wall Street Reform and Consumer Protection Act was
passed by the U.S. Congress on June 25, 2010.
Dodd-Frank was intended to curb the extremely risky financial industry
activities that led to the financial crisis of 20072008. Its goal was, and
still is, to protect consumers and taxpayers from egregious practices. Some say it contributed to risk taking and
speculation in stocks and derivatives, while reducing institutional demand for
commodities which lowered inflation.
Heres proof of out sized stock market gains and P/E expansion since 2009:
·
The historic appreciation of equities from the end of
1925 till 2008 (for 83 years) showed a compounded total return on the S&P
500 of 9.6%.
·
Whereas the total return of the S&P from 2008 to date
is 13.3%.
·
The historical average S&P P/E is 13.3 and its
currently 24.6 times.
Victors Conclusions:
To not adjust for the changes in the law and rules is to be behind the
times in adjusting valuation metrics for stocks. Clearly, corporations have
captured Congress for these very beneficial law changes. Also, the FED is owned by the banks. What the
Fed says and does is made to fit their desired outcomes (which may involve a
hidden agenda).
End Quote:
Roosevelt is dead: a man who would never tell the truth when a lie would
serve him just as well. Douglas MacArthur
.
Be well, keep active, and try to be objective in this age
of disinformation and propaganda campaigns.
Till next time
.
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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