The secret to outperforming the S&P 500 is not to be invested in the S&P 500.
In last week’s memo I wrote:
My investment approach is an AI trade; a multi-year growth catalyst based on the race to capitalize on the potential of AI to revolutionize the way global businesses operate.
The tech (AI) trade continued to prove itself to be the one to be invested in this week as it has all year.
The NASDAQ 100 gained 3.45%, whilst the S&P 500 gained 2.74%, and the Dow 2.90%.
This was despite some midweek share price weakness from large-cap tech:
1) Thursday was Microsoft’s (MSFT) dividend day sending shares markedly lower.
2) Wednesday saw Adobe (ADBE) revealing that it is facing regulatory scrutiny over its subscription models and forecast annual and quarterly revenue below estimates. It added that this matter ‘could have a material impact on its financial results and operations’.
In response on Twitter I commented:
NASDAQ not performing as well as the S&P 500 or the Dow due to some short-term negativity in the tech sector. As far as I can tell the negativity is overdone and AI trade is still on.
Tech is still beating the S&P 500.
Let’s dive into the two indices.
The S&P 500
The big news event of the week was The Fed’s last meeting of 2023 and their unsurprising announcement that they are holding rates at current levels and hinted at rate cuts in 2024.
The Fed is really leaning into the soft landing narrative which is reliant on CPI data continuing to print ever lower numbers. Officials said they expect to lower rates by 75 basis points in 2024 which will fuel the S&P 500 to a higher finish for 2023.
The other big news event was that the annual rate of inflation declined to 3.1%, from 3.2% a month earlier.
Wall Street enjoyed it:
The monthly rate in November ticked up by 0.1% which was already priced into the market.
As a result, Wall Street is convinced that The Fed is done with tightening and inflation has been defeated, even though Jerome Powell refuses to declare victory in the fight against inflation.
Microsoft and Adobe were not able to drag the NASDAQ this week with prices at Friday’s close not seen since November 2021.
I was way off regarding my analysis in last week’s memo of how the NASDAQ would perform for the week:
I’m a little more cautious as a result of the weakening of both the price action and volume declines, but I do not expect long-term declines in the value of the NASDAQ
Traders pushed prices higher and I still believe, for now, that the NASDAQ will perform well long-term.
Additional news influencing the S&P 500 and the NASDAQ this week is that both are reconstituting their indexes to reflect reduced share counts in large-cap names.
Share count reductions typically occur when businesses initiate large buy-back programs.
Apple, Alphabet, Comcast, ExxonMobil, Visa, and Marathon Petroleum are all seeing their share of influence on indices reduced.
NASDAQ and Amazon are seeing increases.
For the NASDAQ itself, eBay and Zoom are being deleted, whilst Doordash and Splunk are being added.
The reconstitution is a timely reminder about risk: currently, five stocks (Apple, Microsoft, Amazon, Nvidia, and Alphabet) make up 25% of the S&P500.
40% of the NASDAQ 100 is made up of six stocks: Apple, Microsoft, Amazon, Nvidia, Alphabet and Broadcom.
Know what you own, why you own it, and manage risk along the way.
Weekly portfolio update
The portfolio lagged the S&P 500 last week due to Microsoft representing a large percentage of the portfolio. The firm declared a dividend, sending shares down for the week by 0.94%.
S&P 500: 2.50%
Pilane Capital: 0.33%
More widely short-term doubts are lingering on the viability of ChatGTP after the UK competition watchdog opened an ‘initial review’ into Microsoft’s investment into Open AI in the previous week.
This is a short-term set-back, if at all. Plus I’m still bullish on Microsoft so it’s staying put.
Jobless claims are out next week as is the Philadelphia Fed Manufacturing Survey so the market will be looking for positive or negative prints as indicators of strength/weakness in the economy; all this to guess what the Fed might do in 2024 regarding rates.
Over the short term, the Santa rally could provide you with an opportunity to outperform the S&P50 before the year is out.
I’ll be opening some trades this week from the focus list to do just that, subscribe to the newsletter to get access.