Leadership? Where Is It Now?
No matter what you are hearing, we are still in summer mode so don’t expect any change in my schedule. Typically, for the last few weeks my columns on Tuesday have been some sort of combination of business and politics and since most of the headlines have been political in nature, mu columns have leaned that way as well.
Today, while I question leadership, it really is not about the Biden Administration, it’s about leadership in the market. Where is it? What is it? Why don’t we have any anymore?
For those of a certain age, leadership in the stock market usually fell on one or two stocks. Be it General Motors, General Electric, IBM or more recently, Apple. You could tell where the market was going, where it had been just by looking at a chart of any of these so called “leaders”. Earnings periods would revolve around the earnings of these companies. The health of the overall economy a lot of times was measured by how well these stocks were trading. They always had a depth of ownership that could potentially give an eye into investor sentiment overall.
When I started my career, IBM was the bell weather. Their earnings were always widely anticipated and trading in the stock prior to and after earnings were announced usually foretold where the market was heading.
No more.
If you think about that philosophy it really was stupid. Basing the direction of an economy and the market on how well one company is doing didn’t make much sense but it happened. Such a broad and diverse economy like the United States could not be pinned down to one stock and yet it was. The rational might have been about the fact that IBM at the time was possibly the greatest company in the World. They had a lock on the fledgling field of computing and their technology center in Westchester, NY was delivering patents faster than a dealer in Vegas. They were the go to technology company and in 1980-1985, they ruled the roost so to speak. General Electric before that had a similar hold on investor psyche. Both great companies that meant a lot to a lot of people.
The transition went to bigger and better tech companies but these companies never held the sway that IBM and GE did. It became ( and still is) about sectors.
For a period of time (prior to 2008) the Financial sector was the bell-weather. Investors would wait for earnings from the major banks and brokerage houses and the markets would follow. Relative to their size, the Financial Sector had larger influence of the S&P 500 than any other group. As JPMorgan went or Goldman Sachs went, so went the market. Until it didn’t. After the reckoning in 2008-2009 financial crisis, banks and brokerage house merged and ended up bigger and more concentrated but their power over the equity markets became limited.
The next leadership group became the tech sector. As the Facebooks and Googles grew. So did the Amazons and Apples. The die has been cast for the last 15 years and that is your new (not really that new) leadership group. Their influence is outsized for sure considering that only Amazon can boast over a million employees and there probably is not one household in the US that is not touched by Amazon in some form. Facebook may have 12 billion subscribers or some unrealistic number, they don’t have me and no matter what, they will never have me. They are losing subscribers faster than they can invent them and their business model may have run its course. Not Amazon’s.
The true bell-weather in the tech sector however is Apple. They have been consistently earning billions of dollars because of the quality of their products and the quality of their customer care. Regardless of the fact that the phones that they consistently bring out year after year are only marginally better than the preceding phones, they sell them. A lot of them. The ecosphere that the Iphone occupies is something to behold and Apple controls it all. You can hate them for it but you have to respect that early on, they knew that the phones were just the doorway where customers and their cash would walk through. They have kept solidly to that vision and made those experiences better and better so people will spend more and more. Pure genius and Apple is by far and away the greatest company in this country if not the World.
That, to me, denotes leadership in the market but markets don’t work like that anymore. While Apple is still widely held (I believe only Disney has more individual owners) it has become a component of multiple indexes and tremendously large ETFs. The trading and pricing of Apple is predicated more on the sector than on the fact that Apple is a great company. Its weighting may be higher in these funds and ETFs but it can be dragged down by Mark Zuckerberg or Elon Musk. Bad decisions in San Fransisco or San Jose can have immediate impact on Cupertino.
So, leadership in the market now is concentrated in Tech and that will probably be around for a while. We are in the 21st century and I believe investors understand that Americas strength has been and will continue to be in that sector but I do long for the days when one company’s earnings were widely anticipated and traders set up their bets based on their research. Now it’s lemming like and hopefully the lead lemming doesn’t go off a cliff somewhere.