August 31st, 2020
Chadd Mason, CEO The Cabana Group
Is the S&P 500 a True Reflection of the U.S. Economy?
The S&P 500 has officially closed out weekly trading at new all-time highs. It is now up nearly 8% for the year. We have watched this “broad” index battle to pass February highs over the past several weeks. It follows the tech-focused Nasdaq, which did so earlier in the summer and has continued to plow higher on an almost daily basis. The Dow Jones lags and is still well below its February highs.
So, why is it that the Dow is so out of line compared to the other two well-known gauges of stock market performance? The reason is very simple – and a bit concerning. I touched on it last week and will provide a little more insight this week. Each of these indices are market cap weighted, which means bigger companies make up a relatively larger share of the index price performance. Currently, the S&P 500 and Nasdaq contain all the big-name tech companies. These include Apple, Microsoft, Nextflix, Facebook, Amazon and more. The Dow, however, only contains Apple and Microsoft. It is this sliver of the economy that has resulted in the incredible rally we have seen in the stock market over the past five months. It is not the “stock market” that has performed so well, but rather a very few huge companies that account for the daily cheering on CNBC. That is what is concerning. The traditional bellwethers of the U.S. economy, many of which make up the old and stodgy Dow Jones 30, are not doing nearly as well. Unfortunately, these companies are a much better reflection of what is going on in the real economy as opposed to the tech sector alone, and big tech in particular. It is for this reason I have suggested that we need to see increased participation by other sectors and industries for the broad market to continue higher. While it may be argued that technology is the new economy and nothing else matters, let us not forget that same argument was made during the high times of the tech bubble in 1998-2000. We all know how that ended. Eventually, it comes home to roost that all of the other companies out there employ many people and their businesses have been financed by many banks. At some point the weakness elsewhere reaches an inflection point, income recedes, loans dry up, and people stop buying new iPhones and ordering clothes on Amazon Prime. Be cautious when people say it’s different this time.
We are asset allocators. We use large asset class ETFs and have been able to benefit from (or at least avoid) the underperformance from the factors I have set out above. With that said, that doesn’t mean we aren’t watching it or that it doesn’t matter, because it does. We remain in our Bullish/Transitional Bullish Scene until proven otherwise.
This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.
Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.
The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. RIAs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.
The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. RIAs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period. Visit www.fa-mag.com for more information regarding the ranking.
No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors may vary based upon differences in associated costs and asset availability.
Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to firstname.lastname@example.org.