Are you feeling confident? The survey says, “Yes!”
According to the Conference Board, which conducts consumer confidence surveys, the Consumer Confidence Index rose to its highest level in August since October 2000. The report indicates that a greater share of respondents plan on purchasing big-ticket items like homes, cars, and appliances in the next six months. Purchases of big-ticket items boost employment and corporate profits. Commensurately, more Americans were optimistic about pay gains.
Apple and Amazon both passed the $1 trillion market value threshold in August, becoming the first companies ever to do so. Market value is calculated by the number of shares of stock multiplied by the price per share. So, if you wanted to buy the whole Apple company, it would cost you over $1 trillion. That probably exceeds the spending limit on your credit card.
When Amazon was founded in 1994 as an online bookstore, the largest companies were General Electric, Exxon, and AT&T. Amazon is now about the same size as seven of the largest consumer companies combined: Walmart, Home Depot, Procter & Gamble, Costco, Nike, Kroger, and Dollar Tree. Amazon’s founder, 54-year-old Jeff Bezos, has surpassed Bill Gates from Microsoft as the richest man in the world, with Bezos worth about $166 billion.
Could any of this mean that tech stocks are overvalued and that we are on the verge of a tech bubble burst that started in March 2000? Not necessarily. According to Barron’s, in 1999 tech companies made up 30% of the S&P 500 by market weight but generated only 13% of the S&P 500’s total earnings, an indication that the big market share wasn’t supported by profits. Today, tech companies make up roughly 24% of the S&P 500’s profits, much more closely in line with its 26% market share.
One very clear lesson from Apple and Amazon is that the economy and leading companies change over time. This supports our investment strategy of avoiding individual stocks and investing in passively managed index funds. The companies owned by passively managed index funds change over time as the economy and companies change. So you are benefiting today from the growth of Apple and Amazon.
More importantly, the biggest and best companies 10 and 20 years from now are probably not household names today. If your portfolio consisted of individual stocks you purchased when they were industry leaders 20 or more years ago, your portfolio would probably include General Motors, Sears, and AT&T, among others. You are better off with your current funds, and they should continue to serve you well into the future.
As always, please contact us with any questions, news, or comments.