“Davidson” submits:
Momentum Investors judge economic activity by using the price-trends of the largest stocks in the SP500. In the current environment this means the 10 issues titled Mega-Caps in today’s marketplace which includes some of the FAANG(Facebook $FB, Amazon $AMZN, Apple $AAPL, Netflix $NFLX, Google $GOOG) issues .Alibaba and Tencent(Chinese based issues) are included in the top 10 as are Microsoft and Johnson & Johnson. It is important to note that even though much is said of the ‘growth’ of these companies, Chinese companies do not report fundamentals using US standards yet trade near 10x Revenue. It is not known if this revenue is reported correctly. Apple’s growth of less 3% annually past 5yrs and Microsoft’s $MSFT financial performance do not justify 6x and 10x Revenue ratios by any stretch of the imagination. Chasing what goes higher in price because it goes higher in price is the type of circular reasoning Momentum Investors are noted for. Microsoft’s price has soared ~500% since 2015 on total Revenue growth of ~30% with weaker Gross, Operating and Net Income Margins. This is not an issue a Value investor would consider especially with the high level of insiders selling. When these price-trends slow, Momentum Investors claim an economic/market bubble is at hand. What is missed is an assessment of economic growth and the discounted market valuations given to the thousands of other issues in the shadow of the Mega-Caps. Momentum Investing is similar to judging a book by the color of its cover without consideration of the contents.
Investors initially pay strong attention to those selected by the media as ‘experts’. If you notice, the media nearly always introduces these individuals with commentary qualifying the speaker as an expert with a record of correct prediction and someone who deserving viewer’s attention. The fact that a particular expert may have mistakenly called past market peaks/bottoms is not part of the introduction. Internet searches reveal histories of expert advice vacillating, hit or miss forecasts which makes the advice of any expert highly suspect. Yesterday, June 17th, 2020, “xxxx xxxxx says this may be the 4th major market bubble of his career” was the CNBC headline. It is left to investors to look this up.
Counter to ‘Bubble Forecasts’ are the economic fundamentals are telling a story of rapid recovery. The weekly Initial Claims series has been trending sharply lower, Retail Sales show a sharp rebound and gasoline demand has already recovered to levels 85%-90% prior to the COVID-19 shutdown. The Household Survey’s last report indicated employment had rebounded nearly 4mil. There is no support for the “Great Depression” or “Major Bubble” forecasts in this data. That the national economic reopening has only been in process a couple of weeks and does not yet include New York, California or New Jersey should alert investors that more positive economic data is ahead. If your focus is on economic/business fundamentals, you see the Mega-Cap issues as extremely over-valued but many of the well-managed companies remain priced at deep discounts even to prior recessionary periods.
The recommendation is to buy Equities, but ignore the Mega-Caps. Buy the well-managed companies selling at severe historical discounts to fundamentals. Buy where these corporate managers are buying shares for their own holdings. Avoid Fixed Income with rates of return at 5,000yr lows.
