Making Room in the Trillion-Dollar Club
Making room in the trillion-dollar club... A big change for these bull-market leaders... The Fed hits its target... Prepare for a 'trade war' escalation... Important news for Chinese stocks... 'The money is moving... period'...
It took more than 200 years to see the first one...
As regular Digest readers may recall, consumer-electronics giant Apple (AAPL) became the first U.S. company in history to reach $1 trillion in market value on August 2.
Just over one month later, we've now seen a second.
This morning, online-retail titan Amazon (AMZN) officially become the second U.S. firm to do so when it traded for more than $2,050.27 per share for the first time. Shares are now up more than 70% so far this year, equal to a gain of more than $435 billion in market value.
To put this impressive figure into perspective: That's more than the total market capitalizations of Walmart (WMT), Costco (COST), and Target (TGT) combined.
But this isn't the only news involving the market's biggest stocks today...
Two of the largest index providers – S&P Dow Jones Indices and MSCI – are about to make a change to the way they classify stocks into sectors, known as the Global Industry Classification Standard, or GICS.
The change itself is relatively straightforward. In short, it will replace the current telecommunications-services sector with a brand-new sector known simply as communication services. But it will dramatically shake up the weightings – as well as the likely future performance – of several other sectors in the process.
You see, the telecom sector is currently the smallest of the 11 sectors of the S&P 500 Index. It includes just three stocks – AT&T, Verizon, and CenturyLink – and has a
This new sector will simply add several stocks from other current sectors to these three, to become tied for the fourth-largest sector. However, these additions just so happen to include some of the best-performing stocks over the past several years.
For example, it will include current information technology sector behemoths Alphabet (GOOGL) and Facebook (FB), as well as other popular names like Activision Blizzard (ATVI), Electronic Arts (EA), Take-Two Interactive Software (TTWO), and Twitter (TWTR). Likewise, several current consumer-discretionary sector leaders like Netflix (NFLX), Disney (DIS), and Comcast (CMCSA), among others, will be joining the new sector.
S&P Dow Jones plans to make these changes following the market's close on September 28, while MSCI will do so on December 3.
These moves could have a few notable effects...
First, they will reduce the tech sector's total market value by more than 20% and leave a much larger weighting to relatively slower-growing computer hardware and software companies like Apple, Microsoft, and Intel. In other words, the tech sector's days as the market's fastest-growing sector are likely numbered.
They will also leave the consumer-discretionary sector even more dependent on Amazon than it already is. According to S&P Dow Jones, Amazon's sector weighting will jump from 27.5% to a whopping 35% following the change.
Finally, these moves could create some significant short-term volatility in several of the stocks in existing sectors. As financial
Real money is put to work using the GICS system: The Technology Select Sector SPDR ETF (XLK) has more than $23 billion invested in it, while the Consumer Discretionary Select Sector SPDR ETF (XLY) has more than $15 billion.
So when State Street rebalances those ETFs after the close on Sept. 21, those funds will have to sell the shares of companies that are no longer part of indexes they track – a not-insignificant amount. The Technology ETF will have to sell slightly more than eight million shares of Facebook, almost a third of its average daily trading volume.
The Communication Services Select Sector SPDR ETF (XLC), which already reflects the changes, has been up and running since June, so it won't be buying shares of companies on the move. "On rebalance day, there's only going to be selling pressure for telecoms," he says.
However, these moves could ultimately be bullish for all three of these sectors. As Barron's also noted, they're essentially splitting the market's best-performing technology stocks from two sectors into three. This would allow portfolio managers to own even more of these stocks – if they so choose to – without bumping into sector-weighting limits.
Well, it's official...
Last week, the U.S. Commerce Department released its latest price inflation data for July.
And it showed inflation has finally returned to the Federal Reserve's official target for the first time in nearly six years. As the Wall Street Journal reported on Thursday...
The personal-consumption-expenditures price index, a broad inflation gauge closely watched by the Federal Reserve, rose a seasonally adjusted 0.1% in July from June, the Commerce Department said Thursday. From July 2017, the index was up 2.3%, the biggest increase since early 2012.
More importantly for the Fed, the so-called core PCE index, which excludes volatile food and energy prices, rose 0.2% in July from June and 2% from a year earlier, matching the central bank's target. Core PCE prices are seen as an indicator of the economy's longer-term, underlying inflation rate.
Following Thursday's report, the probability of an additional rate hike at the Fed's September policy meeting has now risen to a near-certain 99.8%, according to the CME Group's FedWatch Tool.
In short, despite recent speculation that the Fed could soon reverse its hawkish stance, the data continue to suggest the central bank will stick to its plan to raise rates twice more this year, and several more times in 2019.
Finally, late last week we learned that the on-again, off-again 'trade war' with China could soon be 'on' once more...
According to reports, President Donald Trump is preparing to impose the next round of $200 billion of additional tariffs on Chinese imports as early as Wednesday.
If recent history is any indication, the moves could result in additional volatility in global markets, and in Chinese stocks in particular.
However, Friday also brought some bullish news on China for a change: The second step of MSCI's big Chinese "A-share" inclusion plan is officially underway. As Steve Sjuggerud explained to his True Wealth Opportunities: China subscribers just days before the move began...
If you go looking for news on China, you'll find hundreds of articles on trade wars and China's slumping markets. But everyone seems to be ignoring the massively positive long-term story for Chinese stocks.
[Earlier this month], leading global index provider MSCI made its latest major announcement. It plans to push more money into Chinese stocks through its global benchmark stock indexes at the end of August.
This isn't news to us. I've been following and covering this story for years. In May, MSCI implemented its first inclusion. This is Round Two. Specifically, MSCI's May inclusion was 2.5% of the long-term inclusion goal. When markets close on August 31, that will double to 5%.
Overall, that means China's A-share stocks will make up 0.75% of the MSCI Emerging Markets Index. That's still a small amount of the index – and nothing compared to what it'll grow to in the coming years – but we're still talking real money.
As Steve reminded readers, nearly $2 trillion is currently benchmarked to the MSCI Emerging Markets Index. This new weighting of 0.75% means more than $14 billion has already flowed into Chinese A-shares. But again, this is just the start...
Eventually A-shares will make up roughly 17% of MSCI's emerging markets index. You can see this long-term plan on the next chart...
That allocation means roughly $300 billion more will be forced into Chinese stocks over the coming years. And that's only from MSCI...
Earlier this month, the CEO of FTSE Russell – one of MSCI's largest competitors – said his firm could up its Chinese A-share allocations too. And he expects that to happen more and more in the future. Specifically, he said, "The question for people like FTSE Russell and MSCI is not whether we include A-shares, but it's how much."
In short, MSCI's massive shift has started... This means that hundreds of billions of dollars will flood into Chinese A-shares in the months and years ahead.
And remember, this money will move regardless of "trade wars" or whatever else is going on in the markets. This is why Steve remains incredibly bullish on China...
It doesn't matter if it's a good idea or not. The money is moving... period. The money that will flow into Chinese stocks due to these index changes is real, and lasting.
It's starting now. And it'll continue for years to come. This was a central thesis for launching True Wealth Opportunities: China. And it's a major reason why I continue to believe the long-term opportunity in China is strong.
We'll follow our stops, of course. But short-term price movements don't change the long-term story. And over the long term, the opportunity in Chinese A-shares is fantastic.
New 52-week highs (as of 8/31/18): Apple (AAPL), Automatic Data Processing (ADP), Amazon (AMZN), Becton Dickinson (BDX), CME Group (CME), Cisco Systems (CSCO), Fidelity Select Medical Technology and Devices Portfolio (FSMEX),
More praise and contempt in the mailbag. How have we helped you... or disappointed you? Let us know at feedback@stansberryresearch.com.
"Porter, I think your approach [explained in the August 24 Digest] makes a lot of sense for those young enough to benefit. Even at 60, it makes sense. However, as you have pointed out in previous issues, the U.S. (and the developing world in general), is aging rapidly. I am approaching 80 and wonder what are your thoughts on the more sensible approach at this stage of life? By the way, the thing I love most about Stansberry is your consistent efforts to teach 'how' as well as to inform on 'what' are likely opportunities and outlooks. Thanks." – Paid-up subscriber Gary
Porter comment: Gary, thanks for your kind words. You have given us the greatest job in the world. We are sincerely grateful.
Regarding your question – as you know, we don't give any personal advice. I have no idea what's right for you and your family. I can only speak for myself.
As I've gotten older (46 this year) and more experienced in finance (I started investing in 1992), I've come to appreciate more and more the advantages of simply buying great businesses and thinking like a business owner.
Just ask yourself this question: When was the wrong time to buy Amazon, Coke, NVR, Moody's, Apple, McCormick, Disney, etc.? I'm sure you could find a spot, if you worked at it, where owning these companies was difficult or painful. But you'd have to really try. And the advantages of these businesses have been obvious for decades.
Sure, you can do lots of little things to improve your results, but in the long run, these minor moves pale in comparison to the wealth you generate simply owning a great business.
From where I sit today, I'm more and more confident that's what I will do with my capital, always. At any age. But like I said, that's just what seems right for me.
"Porter – [your latest Friday Digest] left out the part of the story with all the bankruptcies the shale 'boom' lead to, as well as the losses for subscribers – CSEG, Range Resources, etc. Par for the course with you guys, but hey you've got a business to run..." – Paid-up subscriber AJ T.
Porter comment: Yes, and I also left out how much money we made with investments like CBI, Targa, Cheniere (short, then long), and others. Likewise, I left out how vociferous and detailed my warnings were in 2014 that a major correction was coming to oil prices. See the open letter I wrote to Devon.
The point, AJ, wasn't what has happened in the past. It was the incredible boom that's developed and how it's reshaping the world's market for energy. Of course, telling you twice just makes me stupid.
"I work in the oil industry as an engineering manager on offshore Gulf of Mexico projects. While that business is picking up it is still relatively slow because a lot of investment money that used to go there is being diverted to shale.
"I also own 2,500 acres of farm ground in Nebraska, so I don't really share your opinion on ethanol. One thing about ethanol that I think is overlooked is its contribution to octane ratings." – Paid-up subscriber D.H.
Porter comment: Ethanol is probably the single dumbest thing in the history of government-mandated capital projects. And that's a pretty long list of really stupid things...
Regards,
Justin Brill
Baltimore, Maryland
September 4, 2018