There are periods in history when buyers gravitate to what they perceive to be the safest places for investment. In the 1960s and early 1970s, it was the Nifty Fifty. Fifty large-cap stocks who through merger and acquisitions owned wholly diverse businesses that controlled a new post-war consumer. This consumer bought their products and their stocks in a time of relative prosperity despite a cultural divide within the country. This fondness for buying the stocks of the biggest of America’s great companies continued until the 1972-1973 recession with the markets not growing appreciably again until 1982.
The logic of the Nifty Fifty appeared sound. Invest in what you know and what can grow in any environment. The logic continues that even if the stocks are expensive by traditional metrics like Price to Earnings(P/E) or Price to Sales (P/S), their growth makes it worth it as they are the backbone of American business. At the time names like Sears, Kodak and Polaroid ruled the day.
In this period of great uncertainty, this logic has reappeared in the form of the largest companies in the NASDAQ 100. Companies like Amazon, Apple and Nvidia are at or near new highs despite nearly 40 million unemployed. Biotech and other technology have been deemed investable while traditional Dow and industrial companies are moribund at best. Basically, nothing interests investors except tech and healthcare which we own, but not exclusively. Compare the performance of the various indices for the first half of 2020. The NASDAQ, despite everything, is up 12.7% year to date compared to the S&P 500 down 3.1% and the Dow down over 8%. Amazingly the top five stocks in the NASDAQ account for 25% of its market cap, a record in stock concentration.
As we discussed in the height of uncertainty last letter, the winners were likely to be larger companies and the government at the cost of smaller companies and the individual worker. The market seems to feel that way as smaller cap indices like the Russell 2000 while off the lows, still is down over 10% year to date. Foreign markets are mostly negative in the high single or low double digits as well. The NASDAQ has become the safe haven worldwide like gold or bonds but seemingly with upside.
The era of the Nifty Fifty lasted more than a decade but ended badly. A nearly decade long struggle for a stock market eroded by the 1972-1973 recession, a messy war and social unrest. Unlike the Nifty Fifty era, the Federal Reserve is much more in tune to the economic issues of the day and is providing massive liquidity. Nevertheless, from this point, it will be important for the economy and the markets to continue to come back and ultimately expand beyond the NASDAQ to avoid this market becoming another cautionary tale in one-way decision-making. It means the return of small businesses sooner rather than later despite some risks and a unity of purpose to regrow the economy.