2021 was a banner year for the major U.S. indices. S&P 500 up 27%, Nasdaq up 21%, and the Dow Jones index up 19%. Large (by market capitalization) tech stocks led the way. F.A.N.G. names (Facebook, Apple, Netflix, Google) as well as Microsoft, Nvidia, and Tesla, most of which are trillion-dollar companies, helped the S&P outperform other indices. In fact, Apple, Microsoft, Google, Tesla, and Nvidia were up an average of 65% last year, more than double the S&P index’s gain, and were responsible for 31% of the total return. (See CNBC article by Karen Firestone for more details, below)
While these companies were no doubt strong performers, their weight in the S&P, again by market capitalization (or size), are what really powered the S&P outperformance. As long as these large companies continue their dominance, the S&P has the wind at its back to continue its
dominant rise. It is noteworthy, though, that as diverse as an index made up of 500 companies may seem, there is a strong tilt to the largest of the bunch, due to its weighting by market capitalization (Top 5 companies make up 23% of the index, Top 10 make up 30%).
Interest rates rose dramatically in 2021 as the economy and GDP bounced back post-COVID and inflation crept into the economy. The 10-year US Treasury rate is often referred to as a benchmark for various financing such as home mortgages. At the end of 2020, yield on the 10-year UST was 0.916%. 2021 ended with the yield at 1.51%, further rising to 1.85% in mid-January 2022. The rise
can be attributed to a number of factors including growth expectations,
inflation, federal reserve rate setting expectations, and more.
Equities are often valued using the Discounted Cashflow (DCF) method. In a nutshell, a company’s value today is the present value of all of its future cashflows. Each year of future cashflow is discounted at an interest rate back to today’s dollars. As rates rise, the present value of future cashflows decreases. This has an outsized impact on companies with cashflows that are further in the future, typically high growth companies operating at a loss today to gain market share. Conversely, companies that have stable cashflows, with lower development costs, appear more favorable.
Due to this nature of valuation, many high growth darlings from the low interest rate environment post-COVID have come under pressure. Additionally, we are seeing concerns about economic growth, inflation, interest rates and other factors causing pressure more broadly on stock prices.
While understanding these market drivers, it is important to take a step back and remember that investing is for the long term. Near-term movements are difficult to predict, and even harder to trade around. Long-term secular growth companies that are fairly valued are always being sought after. As quality companies with sound fundamentals are “babies being thrown out with the bathwater”, this is the time to go shopping with a long-term outlook.
To summarize select investment philosophy points from renowned investor Philip Fisher, (1) buy companies with dramatic long-range growth in profits and (2) focus on buying these companies when they are out of favor. The second point appears prescient today as it appears that due to various factors mentioned, we are being given an opportunity to buy long-term earnings
compounding companies while they are out of favor.
For more information, visit these websites:
https://www.cnbc.com/2022/01/13/op-ed-these-big-names-propelled-the-sp-500-in-2021-heres-whats-ahead-for-2022.html
https://www.marketwatch.com/story/the-s-p-500-beat-both-dow-and-nasdaq-in-2021-by-the-widest-margin-in-24-years-heres-what-history-says-happens-next-year-11641064618
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The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Please review full disclosure at link, below.
Into the New Year – 2022
2021 was a banner year for the major U.S. indices. S&P 500 up 27%, Nasdaq up 21%, and the Dow Jones index up 19%. Large (by market capitalization) tech stocks led the way. F.A.N.G. names (Facebook, Apple, Netflix, Google) as well as Microsoft, Nvidia, and Tesla, most of which are trillion-dollar companies, helped the S&P outperform other indices. In fact, Apple, Microsoft, Google, Tesla, and Nvidia were up an average of 65% last year, more than double the S&P index’s gain, and were responsible for 31% of the total return. (See CNBC article by Karen Firestone for more details, below)
While these companies were no doubt strong performers, their weight in the S&P, again by market capitalization (or size), are what really powered the S&P outperformance. As long as these large companies continue their dominance, the S&P has the wind at its back to continue its
dominant rise. It is noteworthy, though, that as diverse as an index made up of 500 companies may seem, there is a strong tilt to the largest of the bunch, due to its weighting by market capitalization (Top 5 companies make up 23% of the index, Top 10 make up 30%).
Interest rates rose dramatically in 2021 as the economy and GDP bounced back post-COVID and inflation crept into the economy. The 10-year US Treasury rate is often referred to as a benchmark for various financing such as home mortgages. At the end of 2020, yield on the 10-year UST was 0.916%. 2021 ended with the yield at 1.51%, further rising to 1.85% in mid-January 2022. The rise
can be attributed to a number of factors including growth expectations,
inflation, federal reserve rate setting expectations, and more.
Equities are often valued using the Discounted Cashflow (DCF) method. In a nutshell, a company’s value today is the present value of all of its future cashflows. Each year of future cashflow is discounted at an interest rate back to today’s dollars. As rates rise, the present value of future cashflows decreases. This has an outsized impact on companies with cashflows that are further in the future, typically high growth companies operating at a loss today to gain market share. Conversely, companies that have stable cashflows, with lower development costs, appear more favorable.
Due to this nature of valuation, many high growth darlings from the low interest rate environment post-COVID have come under pressure. Additionally, we are seeing concerns about economic growth, inflation, interest rates and other factors causing pressure more broadly on stock prices.
While understanding these market drivers, it is important to take a step back and remember that investing is for the long term. Near-term movements are difficult to predict, and even harder to trade around. Long-term secular growth companies that are fairly valued are always being sought after. As quality companies with sound fundamentals are “babies being thrown out with the bathwater”, this is the time to go shopping with a long-term outlook.
To summarize select investment philosophy points from renowned investor Philip Fisher, (1) buy companies with dramatic long-range growth in profits and (2) focus on buying these companies when they are out of favor. The second point appears prescient today as it appears that due to various factors mentioned, we are being given an opportunity to buy long-term earnings
compounding companies while they are out of favor.
For more information, visit these websites:
https://www.cnbc.com/2022/01/13/op-ed-these-big-names-propelled-the-sp-500-in-2021-heres-whats-ahead-for-2022.html
https://www.marketwatch.com/story/the-s-p-500-beat-both-dow-and-nasdaq-in-2021-by-the-widest-margin-in-24-years-heres-what-history-says-happens-next-year-11641064618
—
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Please review full disclosure at link, below.