The 2019 Twilight Zone
With 2019 in the books, we are focused on 2020 and beyond. We enjoyed the nice returns from stocks, bonds and gold in 2019, but as always, we are cautious and continue to emphasis diversification. It is very rare that stocks, bonds and gold are this highly correlated. Another strange indicator…The Greek 10-year bond is currently yielding 1.4% and the US 10-year Treasury is yield 1.81%. Are we in the Twilight Zone?
As we were examining the returns in 2019, we peeled back the onion and studied what drove the broader indexes. As we’ve talked about in prior commentary it is important to understand how the various indexes are constructed. In the US, the indexes you always hear about are the Dow Jones (Only 30 stocks) and the S&P 500. The Dow is price weighted (the stock with the highest price per share has the most impact) and the S&P 500 is market capitalization weighted. (share price times the number of outstanding shares). Okay, so why does this matter to investors?
The reason this is important to investors is because two 800-pound gorillas drove a lot of the returns in 2019. Probably easy to guess, but Apple and Microsoft were a big reason all the indexes were up so much in 2019. Apple was up approximately 100% in 2019 and now has a stock price of almost $300 per share and a total market capitalization of 1.3 Trillion dollars. ($1,300,000,000,000). The other gorilla Microsoft was up approximately 55% in 2019 and now has a stock price of almost $160 per share and a total market capitalization of 1.2 Trillion dollars.
To put this into perspective, the combined total value of the Russell 2000 index of small cap stocks is not equal to these two gorillas. 2000 companies don’t add up to the value of Apple and Microsoft.
Other fun facts, Apple and Microsoft are bigger than the whole energy sector. They have also eclipsed the consumer staples, materials, real estate and utility sectors.
Both companies are reasonably valued, but how do you move the needle from where we are today? This is what makes us cautious about both of these stocks and also the indexes they dominate.
The Creekside Team
Andy, Teresa and Mike