“I thought this was the top!”
getty
The many “new all-time high” headlines are misleading. Why? Because the articles exclude this reality: Stocks are priced in dollars, and inflation is eroding the dollar’s value. Hence, stock valuations and returns need to be based on inflation-adjusted dollars.
Using monthly averages, here are the full Covid-affected period results, from January 2020 to January 2023.
Reported results exclude inflation reality
John Tobey
Here are the graph views:
The real picture with inflation’s effect removed
John Tobey
Does this mean stock market is ready to climb further?
No. Instead, it means investing in an inflationary period is especially challenging. Seemingly easy dollar gains can trail inflation, producing real losses in purchasing power. Moreover, an inflationary period has mean streaks that can reverse even those inadequate nominal gains.
In such periods, every company’s pricing power, brand/customer strength, cost controls and growth strategies are tested. Aggressive and defensive competition approaches are key. All companies are faced with the prospects of inadequate revenue growth, troublesome cost increases, and (as a result) reduced profit margins.
Therefore, investors need to remember the saying, “It’s not a stock market. It’s a market of stocks.” Simply put, that means those 500 stocks in the S&P 500 are not working together. Rather, each company is focusing on itself.
Therefore, don’t let the broad stock market brush obscure individual stock details
A good picture of the scattershot results from those 500 companies is this graph. It shows the distance from each company stock’s past all-time high. The five largest companies (MicrosoftMSFT, AppleAAPL, Alphabet, AmazonAMZN and NVIDIA) account for one-quarter of the S&P 500’s characteristics and performance. Add in the next five companies and the weighting rises to one-third. Fully one-half of the S&P 500 is driven by the top 31 companies.
The bottom line: Change is coming
The standard view is that those winning companies are not only driving the new all-time high move, they provide confidence that the S&P 500 is in for a bullish run from here. If only. Nothing lasts forever in the stock market, especially when investors become comfortable and optimistic about past winners.
Follow me on LinkedIn.
