Market Factors: Big stock moves ahead - and the best investing paper ever written

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Today we’ll examine the growing tug-of-war that will determine the market’s next move and revisit my pick for the best investing paper ever written on investing.FILE PHOTO: A trader watches his chart while working on the floor of the New York Stock Exchange July 8, 2014. REUTERS/Brendan McDermid/File PhotoU.S. small cap stocks have outperformed The Russell 1000 large cap index by 10.1 percentage points month to date and outperformed the tech-heavy Nasdaq 100 by 13.8 percentage points.

The current average trailing price to earnings ratio of the Magnificent Seven is 49.1 times. For the Russell 2000 small cap index, it’s 30.1. The main reason the Magnificent Seven became so expensively valued is that there were few other options for strong earnings growth, so investors were willing to pay a higher price for the megacap tech stocks. That would change as profit growth for smaller companies improves.

Conversely, a slowing U.S. economy might lead to the Russell 2000 returning to the 1600 to 2000 range where it sat for the 18 months up to December 2023. The small-cap index, however, is up 38.5 per cent from the October low and settling back would also cause investor pain. In this hypothetical future, investor assets likely head back into large-cap technology and make expensive stocks even more expensive.

· The best investors search for the rare opportunities where they are certain they have an advantage. Mr. Mauboussin wrote something elsewhere that I think about all the time – in games of skill, unlike games of luck, you can lose on purpose.

 

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