S&P 500 becomes one basket with a few eggs, again

This content is provided by Clark A. Kendall of Kendall Capital in Rockville, MD.

What will happen with the U.S. stock market in the months ahead?

That’s the burning question on the minds of investors as we wind down a rollercoaster of a year that brought us extreme volatility with stocks twisting and turning in wild and unforeseen ways during the Covid-19 pandemic.­

While nobody has a crystal ball that can predict with full assurance exactly what’s waiting for us around the corner, looking at current trends can provide clues and warning signs that history may be repeating itself.

Just a handful of companies have been rocketing skyward in the S&P 500 Index, which is a market-capitalization-weighted index of 500 of the largest publicly traded companies in the U.S.

Five stocks now comprise about 20% of the entire S&P 500 market cap, as noted by the financial news website TheStreet.

They include Apple, Alphabet, Facebook, Microsoft and Amazon.

“Companies that have done well have really done well and companies that have done poorly have really done poorly,” said Clark Kendall, President and CEO of Kendall Capital, an investment management firm in Montgomery County, Maryland.

Kendall said the pandemic spawned a “bifurcated” stock market with large technology names seeing disproportionately huge gains.

According to Axios, “the concentration of wealth in a few massive U.S. tech companies has reached a scale significantly greater than it was before the dot-com bubble burst.”

The situation is similar to what happened ahead of Y2K in the late 1990s when people were scared because many computer programs only used two numbers to record the year. There was intense and widespread panic that computers would be unable to operate when the date turned from “99” to “00.”

“In 1999 there was an enormous amount of money and energy spent on making sure that the computer infrastructure was put into place,” explained Kendall. “Major events can shake people too far in one direction or the other.”

At that time, investors were being shaken toward companies such as General Electric and Qualcomm.

But the gains in that specific sector of the market did not continue indefinitely.

“Since 2000, Qualcomm’s revenues and earnings have gone up 17 times but the stock trades at about three-quarters of the value it was 20 years ago,” said Kendall.

The all-time high General Electric closing price was $60 in the year 2000.

Now, the stock’s average price hovers around the $8 mark, according to the research platform Macrotrends.

The 10 years that followed the Y2K scare were in general not so great for investors.

“For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized simple price return of -2.72%,” Forbes magazine noted. “When dividends are factored in, the results do not get much better as annualized total return for the S&P 500 index (with dividends reinvested back into the index) over the same timeframe was -0.95%.”

So, what lessons can current investors learn from that period of time?

For one, you want to be prudent and avoid overpaying for something just because it is all the rage right now.

“I caution people against getting excited about Covid success stories and paying too big of a premium,” said Kendall.

“Investors need to make sure they pay attention to fundamental security analysis, return of cash flows from investments and paying a reasonable price for those future cash flows whether they’re in interest or dividend payments or capital appreciation.”

Another lesson lies in the old cliché of “don’t put too many eggs in one basket” because things will inevitably change.

The pandemic has temporarily forced all of us to spend an inordinate amount of time indoors, relying on packages and groceries being shipped directly to us and communicating through online video platforms such as Zoom.

It has even led to people moving away from big cities.

“Now that more Americans can work and attend school from anywhere, they are increasingly looking to leave large urban centers for smaller, less dense cities with cheaper housing,” CNBC reported.

But the pandemic will pass and our lives will eventually shift back to a more normal state.

Simply put, it just doesn’t make sense to be hyper-focused only on stocks that are doing exceptionally well when we’re living through an exceptionally unusual time.

“What’s being repeated now is people getting overly excited with really good companies and forgetting the nuts and bolts of investing,” Kendall said. “All investors need to own not just a stock, but a diverse portfolio of companies.”

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