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Jeffrey Gundlach, a prominent figure in the bond market, expresses sympathy for “poor” stock investors. While bondholders have suffered heavily in the past two years due to rising interest rates, equity investors continue to rely on the success of big tech names, a risky proposition.
Gundlach points out the popularity of a “T-bill and chill” strategy, where investors park their money in six-month Treasury bills offering an annualized yield of 5.58%. This strategy allows investors to sit back and relax without taking on much risk.
At the annual gathering of bear-inclined investors organized by Grant’s Interest Rate Observer in New York, Gundlach humorously remarks, “It’s 1696656242 exciting to be a bond investor.” He highlights the opportunities in bank loans, offering 9% returns, and floating rate triple-A assets in certain parts of the securitized market that boast 7.5% returns without default risk.
While investors have reaped significant gains from tech giants such as Microsoft, Apple, Amazon, Google-parent Alphabet, Tesla, Facebook-parent Meta, and Nvidia, Gundlach’s warning suggests that their dominance may not last forever. These seven stocks have contributed substantially to the S&P 500’s overall growth, with their absence resulting in a significant reduction in the index’s performance.
Predicting the end of the hype surrounding these tech giants has proved difficult, as the gains they offer entice many investors to follow the crowd, making it challenging to other opportunities in the market. However, Gundlach’s joke serves as a reminder that there are alternatives to stocks, such as Treasury bills, which offer predictable interest payments.
If more investors decide to “chill” in T-bills, awaiting better entry points for stocks or guidance from the Federal Reserve, it would reduce the available capital for riskier equity bets. This shift could pose a problem, particularly for momentum-driven trades that involve buying overpriced companies that have already experienced significant rallies.
Additionally, there is a question about how many investors are left to buy shares of the seven tech giants. Bank of America strategists report that even the least-favored stock, Tesla, is already held by over a third of active long-only funds. These funds have overweight positions in five of the seven stocks, relative to the index. The report suggests that there are “fewer funds left to buy (the) biggest stocks.”
The market capitalization of the seven tech giants accounts for a remarkable 28% of the S&P 500. The top 50 stocks make up 57% of the market capitalization, showing a concentration rarely seen in the market. Absolute Strategy Research notes that this level of concentration has only occurred twice in the past 100 years: in July 1932 and November 2000.
The current situation leaves investors uncertain about the future. While there is no clear conclusion to be drawn from historical data, it is essential to consider that economic pressures may impact the tech growth theme dominant in recent years.
Ian Harnett, co-founder of ASR, considers the current stock market performances as indicative of an end-of-cycle moment, showcasing investors’ willingness to overlook caution in favor of pursuing the same tech growth theme. Harnett emphasizes the importance of considering cyclical economic pressures that potential customers still face, even if these tech companies are expected to be structurally successful in the long term.
While the seven tech giants have dominated market discussions, their returns are not as impressive when considering different time periods. For example, over the past three months, only Nvidia, Facebook, and Alphabet have experienced gains. Over a two-year period, four out of the seven stocks have remained flat or experienced losses.
Some financial advisors, like Deeann Griebel based in Mesa, Arizona, report that their clients are beginning to reconsider their investment strategies. As easy gains become harder to come by, investors are becoming more open to exploring other opportunities.
It may be time for investors to return to stock picking. Harnett points out that nimble bargain hunters have had the potential to outperform headline-grabbing stocks. Japanese value stocks, for instance, have risen 26% this year, outperforming their US counterparts.
If investors are willing to take on the challenge of picking stocks, various strategies may yield significant returns, but they must be prepared to make exceptional investment decisions.
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