Market (Price) Leadership is Very Narrow...

Aug 21, 2020 | Nick Scholte


... and worrisome. For example, today alone, Apple added the equivalent valuation of the entire Royal Bank of Canada ( the 23rd biggest bank in the world by the way). It's a great company and deserved market leader - but prudence must be exercised.

To my clients:

It was a flattish mixed week for North American stock markets with the Canadian TSX finishing up 0.02% (note the extra zero); the U.S. Dow Jones Index finishing down 0.002% [note the two(!) extra zeros]; and the U.S. S&P 500 finishing up 0.7%

One thing has become clear during the Covid-19 pandemic: there will be, and are, winners and losers in the present environment. Companies that support the work from home and/or socially distanced economy will benefit – think the tech companies powering our networks and allowing us to stay socially connected while keeping safe and efficient as we work over an internet connection; think the retailers allowing us to load up on goods quickly and efficiently; think the home improvement and ancillary companies allowing us to update the homes which we all are spending so much more time in; and think the home building and resale markets which are seeing a surge in sales owing to rock bottom mortgage rates.

The losers, which greatly outnumber the winners, include: the “Main Street Ma and Pa” small scale retailers of all stripes; restaurants; hotels and airlines; the oil industry; theatres, theme parks, gyms and sports; even banks given their exposure to looming bad loans from these aforementioned industries.

Broadly speaking, while not universally true, it can be generally observed that the larger a company is, and the deeper its resources to weather the storm, the better it has fared. Further, those companies that are both large AND in the “winner” industries have done particularly well. In fact, spectacularly so. To say that there is a very narrow leadership in the market would be a huge understatement. For the S&P 500, the vast majority of companies still have substantially negative year-to-date all-in returns (dividends included). More specifically, and making the point even more stark, it can be said that the positive returns of the 6 largest technology companies in the S&P 500 have exceeded the contributions of the other 494 companies combined.

While client portfolios include positions in three of these top six tech names, I obviously wish that the positions had been more and greater. Yet, in spite of this hindsight wish, yesterday I actually reduced client positions in Apple by half. Apple, having passed a USD $1 trillion valuation just one year ago, passed the $2 trillion mark on Wednesday of this week (as I type, Apple has added another USD $100 billion in value so far today – approximately the same value as all of RBC which is a one of the largest 25 banks in the world and which regulators have labeled “too big to allow to fail”). Further, priced at 37 times earnings, Apple is more than twice as expensive as is historically typical for an S&P 500 company. And yet the growth rate for Apple is nowhere near as high as another tech giant – Amazon. Sensibility has to come into play at some point, and I fear Apple has stretched beyond a sensible threshold. That there is clear momentum in Apple and all of the tech titans is self-evident, and that these companies are doing very well is also self-evident… that’s why portfolios hold half of them. But again, prudence must be exercised.

I’ll not discuss Covid trends this week other than to quickly note the there is an established decline in new cases in the U.S., and a turn higher in Europe (and, by the way, in BC). I continue to worry how school re-openings and colder weather in the Northern Hemisphere will affect these trends come Autumn.

That’s it for this week. All the best, and stay safe,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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