With this edition we detail a prominent strategist’s advice to hedge against another tech wreck, a surprisingly optimistic economist expecting a “new golden age” and a Spotify project identifying the most streamed albums released every year since 1960.
Looks enough like 1999 for this prominent strategist to suggest a hedge
BofA Securities U.S. equity and quant strategist Savita Subramanian advised clients to thread the needle with portfolio allocations, avoiding both megacap Magnificent Seven stocks and small caps in favour of the equal weight S&P 500. The key point for investors is that the last time a technology-heavy conventional S&P 500 rolled over and underperformed the equal weighted index, the next five years saw the latter outperform by a cumulative 46.3 per cent or 5.6 per cent per year.
Ms. Subramanian emphasized signs of fragility in the market cap-weighted S&P 500 in her most recent report, at a time when valuations are more expensive than the historical average on 19 of the 20 metrics she follows.
The equal weighted S&P 500 is trading at an extreme discount to the conventional benchmark on forward PE, levels approaching the late 1990s tech bubble. But according to equity risk premium (in basic terms, the earnings yield on the equity index compared with ten-year government bond) the equal weighted benchmark should trade at a 12 per cent premium PE ratio to the conventional S&P 500.
An investment in the equal weighted index is essentially a bet in favour of industrials and real estate over technology. The equal weight benchmark has a roughly 15 per cent lower allocation to technology stocks and about five per cent fewer communications services companies, the sector where Meta Platforms and Alphabet live. The equal weight index has a seven per cent higher in industrial stocks and about five per cent bigger weighting in real estate.
Ms. Subramanian is clearly recommending clients hedge against the possibility of a painful technology slump with this report. Small caps are not a great candidate for the same purpose as, even if attractively valued on the surface, the asset class remains mired in an earnings recession. Market history also implies that small caps would be hit hard if U.S. economic recession fears intensify.
The performance data in the firsts paragraph is, of course, from the implosion of the first technology bubble in 2000. Conditions today are different in many ways, the leading tech companies are much, much more profitable than in 2000 for instance. Expensive valuations and lofty, potentially unreachable growth expectations, however, remind Ms. Subramanian enough of 1999 to suggest the hedge.
ETFs tracking the equal weighted S&P 500 are available on both sides of the border.
A much less dismal economist
Economics is known as the dismal science thanks to its dour founding fathers like Thomas Malthus but British- Venezuelan academic Carlota Perez can offer an antidote. The University College London professor developed a comprehensive model of the economics of innovation and believes in the potential for an imminent “new golden age” thanks to the digital revolution that began in the 1990s.
For professor Perez, modern technology represents a “techno-economic paradigm” shift, comparable historically to early mechanization in the late 18th century, steam power and railways in the mid-19th century, electrification in the late 1800s, and mass production in the early 1900s.
Each technological revolution proceeds in the same broad stages. The initial innovation and then a multi-year financial bubble that expands and implodes. If correctly regulates – Ms. Perez is adamant that government has an important role to play at this point – the next stage is a diffusion of the technology through the economy and eventually significantly higher standards of living for the majority of the population.
Carlota Perez’s 2017 speech, summarized by Forbes in From A Casino Economy To A New Golden Age: Carlota Pérez At Drucker Forum is arguably the most accessible introduction to her fascinating and optimistic work.
Diversions
Most streamed music albums 1960-present
Canadian music historian Alan Cross uncovered a Spotify compilation where they listed the most streamed albums released every year from 1960. It’s a fun exercise for those of us of a certain age, even though Spotify has only been around since 2008 which makes this backward looking.
There aren’t a lot of surprises initially in the video with the Beatles inevitably dominating, winning in 1963, 1965, 1968 and 1969. Black Sabbath wins for 1970 with an album that must have terrified parents everywhere at the time. Michael Jackson in 1982 and Nirvana in 1991 were inevitable. Queen seems more popular now, with their 1975 and 1978 albums streamed most.
Canadian artists feature occasionally with Brian Adams in 1984, Justin Bieber in 2015, and The Weeknd in 2020.
The essentials
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What’s up next
It’s never too early to start worrying about domestic bank earnings reports which begin on August 22 with TD and continue on the 27th with BNS and BMO. Domestic inflation data for will be released on the 20th with year over year CPI expected to expand by 2.4 per cent. U.S. advance retail sales are out Thursday with 0.4 per cent month over month predicted for July. U.S. industrial production will also be released – economists expect a -0.3 per cent mark.