It is beginning to feel like 1999 all over again. Prince, who would have been 59 yesterday, penned his song 1999 in 1982. Little did he know, or any of us for that matter, that a great bull market for U.S. equities would start in August 1982 only to end badly in March 2000. Much of the reason for the equity collapse back then was the popping of the great technology stock boon (at one point about 34% of the S&P 500’s weight).
Markets move through cycles, often becoming irrational, and leading to valuations that are extraordinarily stretched. But, “value” is in the eye of the beholder, and there is no exact timeframe when a stock or sector gets too pricey – it just happens. Well, it is starting to feel like 1999, as we are currently living in an environment in which 5 U.S. technology companies (Amazon, Apple, Microsoft, Alphabet, and Facebook) have combined to produce 41% of the market capitalization gain of the S&P 500 in 2017.
Now, this is great news if you’ve invested in either an active growth/momentum fund or a passive large capitalization index strategy, but it is likely putting significant pressure on your value managers. Caution – if you start seeing your value managers begin to invest in these securities, other than perhaps Apple (P/E of 18.5X) use it as a sell discipline, because it is about to hit the fan!
Just as in 1999, we are hearing that things are different today. Supposedly, the difference today is that these companies are legitimate businesses, big data firms, etc. Is this the same paradigm shift that we were supposed to experience 20 years ago? Come on! Great businesses don’t necessarily make for great stocks. Valuation does matter in the long-term, even if it takes a long time to realize that.
DB pension plans pursuing the ROA as their primary objective may appreciate the recent, short-term performance boost from those five stocks, but it won’t help your funded status and contribution expense when the bubble bursts one more time! It is never a bad time to take some profits. Can one really justify Amazon’s P/E multiple at 189.3 Xs?