Wealth Management & Financial Planning

Wealth Management & Financial Planning

Don’t Confuse Me With the Facts!

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We live in a world where stories often trump facts – no pun intended. News outlets and social media seem to fuel this phenomenon. Once a story ignites, it often spreads without refute and possibly without the due diligence of a fact check. Depending on an individual’s natural bias, the newfound information can either reinforce their beliefs, or simply be ignored. The equity market is buzzing with a false story right now.

Whether on the 24/7 CNBC network or on my weekly radio show, it is the “FANG stocks” story that is dominating the conversation. FAANG stands for Facebook, Apple, Amazon, Netflix and Google, now known as Alphabet. Many analysts remove Netflix from the FAANG story due to its market capitalization size. Some analysts include Microsoft in the “big tech” stock discussion. Regardless, large technology companies are the tale of the day. For investors and professional money managers who lived through the tech wreck of 2000, today’s stories are uncomfortable at best and haunting at worst. Try managing your in-laws’ retirement during the tech wreck! The scars of 2000 may be gone but the memories endure.

One technical indicator we monitor to assess the market’s health is referred to as “breadth”. Breadth is the gauge we use to see how companies in the market participate when the market goes up. The better the breadth, the better the health of the market. Breadth was breaking down earlier this year, but has recently improved. Naturally, the media switched gears to focus on a more shocking story. And as usual, it's information without context.

Back in 1999, we used to discuss the “five horsemen” driving the markets–Microsoft, Cisco, Dell, Intel and the now departed MCI. Today, every FAANG story includes a tidbit noting that 30% of all market growth has come from these companies and almost 40% of growth has come from the top 10 companies. Such statements can make it easy to draw conclusions without all the facts. Misleading data points caused many investors to make erroneous decisions during the tech wreck.

JP Morgan’s Quantitative Research department examined real data and found the following information.  Looking at the S&P 500, the top five stocks contributed 24% of market growth year-to-date. The top 10 stocks contributed 35% of market growth.  Additionally, the researchers found these are exactly the same numbers for an average year from 1991 to present. That feels better!

What about the tech wreck gives me nightmares? Research found the top five stocks represented 48% of all market growth and the top 10 stocks accounted for 66% of growth! Yes, there is a big difference between then and now, but this is far from a statement affirming market strength and a promise of sunny days without volatility. Rather the takeaway is that news stories can use facts without context to elicit emotions and drive investors’ decision-making processes. Fortunately for the families we serve and the more than $300 million in assets manage, we employ discipline not emotion.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

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