Cash Or No Cash? Optimist, Pessimist Or Realist?

Our Matt McAleer is a veteran of nearly three decades of markets. He has long been and remains on the firing line as a money manager. He contributes to our ongoing discussion. He recently dropped a pearl of wisdom, and I asked him to put it in a written note.

Matt wrote:

“I found these two recent articles extremely interesting. Because I tend to lean pessimistically about the markets and risk – probably from trading through 2001/2 and 2008/9, when I started my own company – I purposely spend time reading/contemplating leanings opposite to mine. I have discovered outstanding traders that I enjoy reading because they trade real capital and thus must consider risk. Here are links to a couple interesting articles.”

2020: What a Time to Be Alive,” by Morgan Housel

Investors Run from Stocks at Record Pace,” from Ciovacco Capital Management

Matt’s point is well taken. We glean the biggest, most useful picture by seeking different viewpoints.

Punditry practitioners and analysts have a bias toward finding faults and risks. And the writers and talking heads who do not manage money as professionals are really just proffering opinions. It is different when you make your living having to decide what to buy-sell-hold and when to do it. And it is different when you have to determine if and when you are wrong and how and when to take losses.

A similar difficulty occurs when markets are setting new highs and the professional wonders where the top will be and how stretched valuations are. Think about this question when the 5 largest stocks are 1/5 of total market weight and are in the highest beta sector.Remember cash is zero beta: The S&P 500 index of all 500 stocks has a beta of 1; those 5 largest stocks have a beta above 1.5.

So far, this 2019–2020 stock market rally has been fierce. It started at the low point on Christmas Eve in 2018. Since then, the bias toward the large-cap tech sector has dominated the market. Consider that there are four companies with market caps above $1 trillion. They are Amazon, Apple, Microsoft, and Alphabet (Google). A fifth large-cap stock, Facebook, sits at a mere $700 billion. The total of the FAAMG stocks now equals about 19% of the market capitalization of the S&P 500 Index. The other 495 stocks make up 81% of that market cap. And the market cap-to-GDP ratio is the highest in the entire history of the American stock market while the profit share of that GDP is stagnant except for the benefit of the tax cuts.

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Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ ...

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