Can Just a Few Dogs Keep Pulling the Stock Market Sled?

Two summers ago, I had the amazing opportunity to present on the 2016 Money, Metals & Mining Cruise. Just like the land-based conventions I’ve attended in the past (and the upcoming San Francisco Money Show, which you can register for here), the Anchorage-to-Vancouver cruise gave me a great chance to share my insights and “talk shop” with investors like you face-to-face.

But it wasn’t all work and no play. My wife and I also had some time to experience the wild and beautiful Alaska scenery via a handful of shore excursions. That included one visit to a sled dog training facility outside the capital city of Juneau.

Dogs are raised and trained there in the offseason using wheeled sleds. Many of them will ultimately compete in events like the world-famous Iditarod. The facility’s staff did a great job explaining all that goes into preparing for that grueling race, which covers approximately 1,000 miles depending on the year and exact route.

One important lesson: The entire team of dogs has to learn how to work and pull together, or they have virtually no chance of success.

Unfortunately, we aren’t seeing that in today’s stock market. Only a handful of “dogs” are doing all the work!

I’m sure you know the acronym “FAANG,” right? It refers to the overhyped, over-owned and largely overvalued stocks you hear about on financial television all day, every day. Facebook (FB, Rated “A-”) is the “F” stock, followed by Apple (AAPL, Rated “B”), Amazon.com (AMZN, Rated “B-”), Netflix (NFLX, Rated “C”), and Google parent company Alphabet (GOOGL, Rated “B-”).

What you may NOT know is they’re pretty much the only game in town performance-wise!

The S&P 500 Index rose about 2.7% in the first half of 2018. But the five FAANG names accounted for ALL of that rise and then some. That's according to Standard & Poor's and BofA Merrill Lynch.

Specifically, the FAANGs contributed a 3.4% GAIN to the broader-market S&P 500 — while the entire rest of the index contributed a 0.7% LOSS.

Using a slightly different methodology and time frame, CNBC recently concluded that just THREE technology stocks — AMZN, NFLX and Microsoft (MSFT, Rated “A”) — generated 71% of the year-to-date returns in the S&P 500. Seven out of 11 market sectors actually LOST money in the first half of the year, with industrials (-5.6%), staples (-9.9%) and telecom (-10.8%) the biggest laggards.

No less than Larry Fink, the CEO of investment firm BlackRock (BLK, Rated “B+”), just said: “If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling.”

His firm is the world’s largest money manager, with $6.3 trillion in assets under management. When he makes a statement like that, investors would be wise to listen.

My take? A market that can’t broaden out is a market you can’t trust. While tech stocks and small caps have managed to make marginal new highs, everything from financials to transports to emerging market shares have not.

Moreover, when you have just a handful of stocks from the same exact sector dominating gains, “concentration risk” skyrockets.

That means anything — from a slowdown in online advertising or subscription growth, to a significant government antitrust or data privacy push — could hurt not just one of these market leaders, but almost all of them … in one fell swoop!

That would prove disastrous for this top-heavy, tech-focused market.

Throw in the fact the IPO market is totally out of control, the yield curve is flattening relentlessly and the Federal Reserve is continuing to raise interest rates and shrink its balance sheet, and you can see why I’m so darn cautious.

My recommendations: Keep favoring defensive sectors like utilities, consumer staples and select REITs ... maintain a much higher allocation to cash ... and use tools like inverse ETFs to hedge or target downside profits in select sectors when appropriate. More specific advice can be found in my July issue of the Weiss Ratings’ Safe Money Report, which just went to press last Friday. Click here to get your copy.

Until next time,

Mike Larson