There are times when the S&P 500 looks like it is doing great but when really only parts of it are doing well. We saw this in the late 1990s, as we said above, when high tech and Internet stocks soared and pulled the rest of the average along behind. We are seeing the phenomenon again. Low-quality stocks – – the autos, banks, mortgage companies left for dead last spring – – are soaring, while stable and high quality stocks like Exxon are not. Our portfolios owns high quality stocks. They are up nicely through November 30, 2009 (in double-digit figures) but the S&P 500 is up even more at 24.08%. Anyone trying to best the price performance of the S&P 500 must today own more low-quality stocks (more banks, auto companies, mortgage companies) than are in the S&P 500 index. This is not a game one wants to play at this time, at least not in our opinion. We think one should still own stocks, but of the high quality sort. Let someone else play musical chairs with the risky sectors of the market.
Painfully reminded that wealth has an ephemeral quality to it (think of all the housing wealth that has simply gone “poof”), people have been stuffing money into the mattress. The Federal Reserve estimates that there is more money in money market funds ($9.5 trillion) than there is in the S&P 500-stock index ($9.2 trillion). The latter comprises the stocks we usually invest in at O’Brien Greene. So double that is in cash, idle. When you add the Dow Jones Industrial Average and all the other stock indices to the S&P 500, you get “total stock market capitalization”; of this total money market funds amounts to about 35%. However you measure, we are talking big numbers. Before the financial crisis, cash amounted to about 15% of that total. And it is not just individuals who are stuffing money into the mattresses. Barrons Magazine reported this weekend that corporations have never before had so much of their assets sitting idle in cash.
Are money market funds the same as the mattress? Sure. Neither pays any interest. The average money market fund pays 0.15% annual interest, which I suppose is more than you get in a mattress, but not much more. I don’t see much difference between the mattress and the money market. Either way, the money is not doing anyone any good, except maybe psychologically. Bottom line: it is a tragedy to see so much wealth-building potential sit idle.
Franklin Roosevelt had the same problem in the Great Depression. He described the problem as “capital going on strike.” To solve the problem, he reasoned that if you can draft soldiers into war, why not capital? So he drafted capital, in the form of a tax, to make it go to work. We know, of course, what happened. People hoarded more cash. Is this what we have in store now? Talk of ending stock options and bonuses seems rather pointless. It is just going to scare people with money to sit on it.
The very attempt to force people to spend money tends to have the opposite effect. I think of Chinese handcuffs, which we used to play with as children. The more you struggled to get out of them, the tighter they became.