Topley’s Top 10 – November 22, 2023

1. Forward P/E of Magnificent 7

2. Another History of Concentrated Stock Rallies

Alpha Architect Blog Larry Swedroe on Stock Market Concentration

Consider that as of October 6, 2023, while the iShares Russell 1000 Growth ETF (IWF) had a P/E of 24.2 and Vanguard’s S&P 500 ETF (VOO) had a P/E of 20, the P/E of the Vanguard Russell 1000 Value ETF (VONV) was 15, the P/E of the Vanguard Russell 2000 ETF (VTWO) was 13.3, and the P/E of the Vanguard Russell 2000 Value ETF (VTWV) was just 10.5. Now consider the P/Es of the magnificent seven: Apple, 29.8; Amazon, 100.7; Microsoft, 33.8; Nvidia, 110.5; Alphabet, 29.4; Tesla, 73.8; and Meta Platforms, 36.8. That’s an average P/E of 59.3.  

One of my favorite expressions is that what you don’t know about investing is the investment history you don’t know. With that in mind, let’s review the list of the 10 largest stocks by market cap in the S&P 500 Index at the turn of the century. They were Microsoft, Cisco Systems, Exxon Mobil, Intel, Citigroup, IBM, General Electric, Oracle, and Home Depot. From January 2000 through September 2023, Vanguard’s 500 Index Fund (VFINX) returned 6.5% per annum. How did the top 10 perform?

  • Microsoft: 9.5%
  • Cisco Systems: 1.6%
  • Exxon Mobil: 7.9%
  • Intel:1.7%
  • Citigroup: -7.1%
  • IBM: 3.8%
  • General Electric: -1.8%
  • Oracle: 6.6%
  • Home Depot: 8.6%
  • AT&T: 1.4%

The average return to the 10 largest stocks in the S&P 500 Index from January 2000 through September 2023 was just 3.2%, underperforming the index itself by 3.3 percentage points. Because these were the largest stocks, the underperformance relative to the remaining 490 stocks was even worse. Investors in the top 10 stocks took a much greater degree of idiosyncratic risk and earned lower returns. Forewarned is forearmed.

3. U.S. Bank Stocks at Record Low Valuation vs. S&P

4. Banks Ongoing Headwinds.

Torsten Slok, Ph.D. Chief Economist, Partner-Eight months after the SVB collapse, large banks continue to enjoy significantly lower funding costs and, hence, higher profit margins than regional banks, see the first chart below.

With ongoing headwinds from CRE holdings, the held-to-maturity book, and regulatory uncertainty, it is going to take some time for regional banks to repair their balance sheets.  This continues to be a macro problem, because banks number 5 to 4000 by assets make up 60% of all assets in the banking sector see also the second chart showing the ongoing sharp slowdown in bank lending.

5. Interest Rate on U.S. Debt Up $924 billion in 12 Months.

When Debt Matters

When interest rates were at record lows in 2020, many said that the exploding National Debt “didn’t matter” because servicing that debt was costing us very little.

Fast forward to today and few are making that same argument, as National Debt has continued to increase (now at $33.7 trillion) and the average interest rate on that debt has moved substantially higher.

The result: the Interest Expense on US Public Debt has now moved up to $924 billion over the last 12 months, another record high. If it continues to increase at the current pace it will soon be the largest line item in the Federal budget, surpassing Social Security.

6. Argentina About to Make New Highs on Milei Presidential Victory

7. Better Breadth…Equal Weight S&P Closes Above 200-Day

8. Consumer View Current Buying Climate for Homes as Worst in History.

The United States: Consumers view the current buying climate for houses as the worst in recent history.

9. The Share of Americans Who Are Mortgage-Free Is at an All-Time High

Bloomberg By Alexandre Tanzi

10. The False Picture on How Success Happens-The Daily Stoic Blog

We have a false picture about how success happens. We often only see the results and almost never the process of things, so we tend to think that the finished product—a book, being in shape, being wise—is impressive, and therefore the process by which that event was created must have been equally brilliant.

In fact, it’s not.

All success happens the same way: “action by action,” as Marcus said. Just after the release of Metallica’s eleventh album, Metallica’s Lars Ulrich explained the simple secret to their high output:

“I wish I could romanticize it, and tell you that we’re sitting down and there’s a destination, but it’s basically just work. You write one song, then you write another song and eventually you’ve got an album.”

This is what the Stoics believe too. That the little things add up to make the big things. This is what Zeno meant when he said, “Well-being is realized by small steps but is truly no small thing.” And what Seneca meant when he wrote, “Each day, acquire something that will fortify you against poverty, against death, indeed against other misfortunes, as well and after you have run over many thoughts, select one to be thoroughly digested that day.”

One gain per day. That’s it. It’s not romantic. It’s basically just work.