S2N Spotlight
For those of you who don’t know, the S&P 500 that we all follow is an index that is weighted according to a company’s market capitalisation. So a company like NVIDIA, which became the largest company in the world, will have the biggest weighting in the index, and its price action will influence the index more than one that is equally weighted for all 500 companies in the index.
Nothing in this story is what it seems, and each market commentator is presenting the data in a way that fits their story. I personally learned a lot from this analysis.
The chart below shows how things are being presented by most of the talking heads. You see the classic market cap SP500 cumulative returns powering ahead over the last 5 years. If you do it over the last year it is even more pronounced as the mighty few drive the index up.
As I wasn’t familiar with the equal weighted index until a few months ago, I thought this might be a big deal. It turns out it is but for different reasons than I thought. When you zoom out from 5 years to 50 years, you get a completely different perspective. I love what the bigger picture is showing. It is highlighting that taking a more robust (anti-fragile) long term approach is better in the long run. Instead of betting big on a few winners the likes of General Electric, Cisco, Enron, Nvidia it is better to spread your investments more evenly. What is the best now isn’t often the best over time.
According to ChatGPT only these 5 companies are still in the index from 50 years ago: 3M Co, Exxon Mobil Corp, Ford Motor Co, General Electric Co, Procter & Gamble Co.
Take a look at how the equal weighted index kills the classic SP500 market cap index over time.
The story doesn’t end there. For those of you into a little bit of mathematics, in the chart below I have plotted both indexes on their own y-axis in log scale.
Linear Scale: Shows the impact of compounding and highlights absolute differences in cumulative returns. This reflects the big cumulative differences that are compounded in the linear chart above.
Log Scale: Emphasizes the rate of growth, showing how consistently the indexes grow over time and making relative comparisons easier.
This is a complex subject and the truth of the matter is you don’t bank log returns. The point I am making here is that there is a time and place for comparing apples with apples but there is also a time for reaping what you so and cumulative returns with compounding is what you get for your hard work. If I have confused you then I have done my job well and that is the point I am trying to make.
S2N Observations
I mentioned a few weeks ago that we are currently seeing a Dow Theory non-confirmation with the Dow Jones Transport index diverging from the new all-time highs of the Dow Jones Industrial average (classic Dow). I am pretty happy with the way this visualisation came out. Python is super powerful and I will make all this code available for free.
I meant to mention this yesterday you can see that the Reverse Repo market continues to shrink on its way to an intended zero. We are down to $375 billion the more this shrinks the more banks will have excess reserves to lend and juice the economy. The Feds attempt at a soft landing.
Yesterday the US released retail sales below expectations signalling a slowing economy. So of course the discussion is once again all about cutting rates. I am not sure if you spotted that wage growth in the Euro zone came in at above 5%.
Closer to home I read the press release by the new Reserve Bank Governess (is that sexist) with interest. What I like about Michelle Bullock is she says it like she see’s it. According to her analysis she doesn’t have a clue. I think she is probably the most honest central banker in the world today. Inflation is still high and inflation expectation is entrenched, if speaking to my friends and family is anything to go by. Growth is weak and people are starting to feel the effects of higher interest rates and an increased cost of living. The saving grace at the moment is that there are jobs, apparently if the stats are to be believed. Retailers will struggle to keep passing on the increased costs they are experiencing to customers who have burned through savings and are drowning in debt.
On the job front a slightly different picture is starting to emerge, you can see that non-farm job openings in the US continue to weaken as of the latest data available.
I wanted to end off on a crazy note. Yes the Canadian Loonie, has the biggest non-commercial short interest in history. Essentially speculators are saying the current price is lunacy.