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Thursday, 7 December 2017
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Should We Sell Everything

Member email: Should we sell everything? – I’ve already had a Member email asking whether we should sell everything after the woeful performance of the US markets on the news of the tax reform bill passing and considering the rise in the US markets in the last couple of years which are bordering on previous pre-crash rallies.

Reply: The golden rule of broking is that if a client rings up with something on their mind (selling everything for instance) don’t argue, just find out what they are thinking and execute on it as quickly as possible. Plus the market is not a science it is an animal, brokers will concoct some scientific argument for everything, but if the herd changes mood it simply doesn’t matter. No scientific argument holds water in the face of a herd of sellers. So the bottom line is that if you want to sell….you sell.

Meanwhile here is the scientific argument.

Since Trump’s election on 4 November last year the Dow Jones is up 37.19%, the S&P 500 is up 27.9% and the US technology sector is up 45.2%.

Since the market low in January 2016, just less than 2 years ago, the Dow Jones is up 58.8%, the S&P 500 is up 47.2% and the US technology sector is up 81.1%. In the two years before the 1987 crash the S&P 500 went up 64.5%, the Dow Jones went up 80.3%. On that basis we are about 14% from a Crash level (believe that science and you’ll believe anything).

The technology sector has a market cap of US$5.80 trillion which accounts for 25% of the S&P 500 index (which has a market capitalisation of US$23.4 trillion) and four technology stocks account for 15% of the S&P 500 index (Apple, Google, Microsoft, Facebook). The technology sector has increased by over $7.00 trillion in value in less than two years. In which case the technology sector has accounted for $2.5 trillion of the increase in the S&P 500 which is 36% of the rise in the market. Without the rise in the Technology Index the S&P 500 would only be up 28% in the last couple of years, which is pretty much in line with our market.

Our market is up 19.1% since the Trump election and is up 28.6% since the low just under two years ago. Before the 1987 Crash the All Ordinaries went up 119% in less than two years ahead of the sell-off. Our market is up 28.6% in the last two years and has gone nowhere in three years. We can pretty much relax. Any sell-off is unlikely to be more than a correction and a buying opportunity. The bottom line is that without the technology sector the US market has moved in line with our own market. It is not overblown at all.

It is all about the technology stocks. Those big five technology stocks are now the biggest five stocks in the S&P 500 and account for 15% of the S&P 500 index. If the market is going to Crash it is these stocks that will lead it and judging from their PEs and the overwhelming broker buy recommendations, they are not that expensive, the share price rises are backed by earnings. So the risk is not that the markets will Crash but that they may correct if the momentum behind the technology sector is lost, momentarily.

  • Google PE 32.3x dropping to 25.1x.
  • Apple PE 15x dropping to 14.2x.
  • Microsoft PE 24.8x dropping to 22.3x.
  • Facebook PE 30.4x dropping to 26.9x.

But as always refer back to paragraph 1 - If you want to sell....you sell and you'll have to make the decision on your own because no-one on this end of the phone will ever suggest that, except of course at Marcus Today Wealth Management...

 

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