Right on top of Warren Buffett’s Berkshire Hathaway
2022 climate looks less favorable
US government policies are focusing on large company actions that may be anti-competitive. Furthermore, the nobility now lacks the need to maintain the increased base upon which future development is built. Then there is the natural tendency (in percentage terms) to get bigger.
Increased inflation raises three needs: increased prices (revenue), controlled costs (expenses) and retained customers (demand). With wage hikes as well as increase in prices, there will be pressure on potential customers to reduce their non-essential expenses where possible. This includes both new products and subscription services.
Rate of interest
Then there is an increase in incoming interest rates. Ultimately they will impact consumers and businesses. However, bond prices and stock valuations will soon be impacted. That latter item is where the big guys can be killed. To see how current pricing will be viewed as interest rates rise:
This brings us to the S&P 500
Those six stocks have a total market capitalization of $11T, up from $8T at year-end. The current size is 26% of the total S&P 500, up from 24% last year. Obviously, the increased load is due to better performance.
The S&P 500 has a year-to-date return of 28% (including dividend income). The six giants (opening-year market capitalization weighted) are up more than 38%. The weighted performance of the other 494 companies (74% of the S&P 500 market capitalization) is 24%.
In past markets, such performance concentration has eventually given way to reversals. Often, a trigger occurs when a new tax year approaches, and the stalled sales activity is issued.
If the six giants underperform in 2022, they will obviously have a bigger impact on the S&P 500. Additionally, because each is a Nasdaq-listed stock, they will affect the Nasdaq Index and the Nasdaq 100.
On the other hand, depending on what else is happening, the Dow Jones Industrial Average may shine by comparison. Only Apple and Microsoft are among the 30 stocks. Their influence, by price weighting, is Apple at 3.2% and Microsoft at 6.2%, totaling 9.4%.
Bottom line: There is no stock market trend line from 2021 to 2022
It is likely that COVID will take a lesser place in investor thinking and its impact on the economy as 2022 moves into spring and summer. At the heart of Wall Street’s positive analysis and forecasts is the six-month outlook. Hence, we can expect the Covid dissipation and restoration of normalcy to strengthen the stock market.
However, the concerns discussed above could impede both the growth of the “real” (inflation-adjusted) economy and the valuation of the stock market.