by Gary Alexander
November 28, 2023
At the end of October, according to several speakers at the New Orleans Investment Conference (held November 1-4), and backed up by S&P data, the technology sector accounted for 28.1% of S&P 500 capitalization, more than the next two sectors (Healthcare and Financial) combined, and more than 10 times each of the three smallest sectors – Utilities, Materials and Real Estate – at about 2.4% each.
Tavi Costa, Macro Strategist at Crescat Capital, told the assembled investors in the Big Easy that Apple and Microsoft alone (comprising 14% of S&P capitalization) dwarfed those three smallest sectors PLUS Energy (at 4.6%), and they were 70 times larger than the entire metals and mining stock sector (at 0.2%)!
Furthermore, the S&P 500 Communications Services sector (at 8.2% of the S&P 500) contains two of the Magnificent 7 tech stocks, so the Tech Mega-Colossus really accounts for over 36% of the S&P 500.
This has happened several times in market history – and not just in the “dot-com bubble” of 1999-2000.
I’m currently acting in a local play that is centered around the railroad boom of the 1890s, resulting in the Panic of 1893. It’s a lot more personal and heart-warming than all that, of course; it’s centered around one family in nearby Port Townsend, Washington, but the fate of that town was wrapped around the high-tech fantasy of that day – building a railroad terminal for Pacific trade from Puget Sound to the inland U.S.
From 1850 to 1910, ‘transports’ (dominated by railroad stocks) comprised the bulk of the New York Stock Exchange. Railroads peaked as a controlling industry during our Industrial Revolution in the 1870s and 1880s, and they still controlled 2/3rds of the market around 1890, and nearly 63% at the end of the 1890s.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
New York Stock Exchange 1900 (end-1899) 1950 2000
Railroad stock capitalization (NYSE) 62.8% 4.2% 0.2%
(Source: Triumph of the Optimists: 101 Years of Global Investment Returns, Princeton University Press, p. 24)
In addition, “there were also many railroad-related stocks, such as street railways, rail freight companies, and railroad car and wagon manufacturers, and if these are included, the U.S. weighting for railroads rises to 70 percent. 101 years later, railroads have declined in importance, almost to the point of stock market extinction, representing just 0.2 percent of the U.S. equity at the end of 2000” (Triumph of the Optimists).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In hindsight, it’s easy to see that all that money flowing into railroads caused them to become overbuilt. The first bubble to pop came in February 1893, just 12 days before the Inauguration of the new (and former) President, Grover Cleveland – the only Democrat elected in the 50 years between the Civil War and Woodrow Wilson in 1912 – with the bankruptcy of the Philadelphia and Reading Railroad. Then came some big bank failures and bigger railroad bankruptcies – at Northern Pacific, Union Pacific and the future movie song – The Atchison, Topeka and Santa Fe. In all, 500 banks and 15,000 companies failed.
Out west, Port Townsend was devastated – in history and in our play. To this day, that little port town is best known for its Victorian architecture, since so many buildings were erected in the 1880s and 1890s – the Victorian era – to welcome the coming railroads. By the time Washington became a state in 1889, Port Townsend was the fourth largest city in the State, and its boosters hoped it would become the “New York of the West.” After all, it offered an ideal deep port with a vibrant waterfront, the first town to welcome ships plying the Pacific to the U.S. Northwest – for trade to and from America and the emerging Orient.
Late in 1889 (after Washington gained statehood), Union Pacific offered to make Port Townsend the northern terminus of its trans-continental line, if U.P. could acquire the Port Townsend & Southern’s franchise and rights of way, and if the city would pony up $100,000 (about $5 million in today’s money) in their venture. A sucker’s bet, it turned out – and the citizenry bought into those unrealistic promises, at the urging of boosters and its cheer-leading newspaper, the Leader, which opined: “Port Townsend will now get its share of the wealth and commerce of Europe that … has heretofore passed us by.”
Railroad fever consumed the little peninsula. About 2,000 local and imported workers began chopping trees and laying rails. Business boomed, property values soared and before 1890 was out, the city boasted six banks, six dry-goods stores, six hardware stores, 10 hotels, 28 real estate offices, three streetcar lines and a new electric company. In our little play, however, I portray an aging sea captain who passed through San Francisco on his way north and heard from “lads who know” that “they won’t be layin’ the track out here. It’s a dead end. There’s nowhere for a train to go…. The ships will sail right past Port Townsend.”
And that’s what happened. Property values plummeted. Port Townsend’s population fell by 30% in the 1900 Census, and Port Townsend would never again be among the 10 largest cities in Washington state.
The lessons are clear to us in hindsight. Fad investments come and go. The money pouring into them gets spent on bubble projects that can’t be sustained by long-term demand. Common-sense products and services are ignored, and so become affordable again, like those unpopular sectors, headed recently by energy – which, by the way, still runs the world. As Rick Rule said in New Orleans, fossil fuels once provided 82% of our energy needs at their peak in the 1980s. Now, after 40 years and $5 trillion invested in alternative energy sources, our percentage of energy coming from fossil fuels has fallen to…81%!
This is the basic principle of Contrarian Investing, also expressed in poetic terms as, “The Road Less Traveled,” or in sports argot as, “Hit ‘em where they ain’t.” It’s simply a way to improve your odds.
Two Examples of Contrary Investing in Today’s Market
If we truly believe that electric vehicles (EVs) are the answer – as millions seem to believe, including the Biden Administration – then true believers in EVs must realize that mining stocks are the wave of the future. EVs rely on minerals far more than conventional cars do – by a factor of about 6-to-1. An EV requires 206 kilograms (453 pounds) of specific minerals, beyond basic steel, vs. 33.5 kg (74 pounds) for a standard gas-run vehicle. EVs require far more copper and manganese, plus elements not tapped by our basic gas guzzler, like nickel, graphite, cobalt and lithium, yet mining and mineral stocks make up just 0.2% of market capitalization. If investors believed in EVs, they would own a lot more mining stocks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A second example is the traditional energy sector. Energy was way over-represented in the S&P 500 in mid-2008, when crude oil reached its all-time high of $153, and the energy sector reached a recent peak of 16.2% of S&P 500 capitalization. By 2020, energy dipped to barely 2% of S&P market capitalization.
In 2021, Louis Navellier invested in energy, and energy was the only S&P sector that increased in 2022. In 2021, Louis said energy would double and double again to 8% of market cap and perhaps top tech by 2025 at 30% of S&P market cap. The energy sector has been up and down in 2023, but it’s still only 4.6% of S&P market cap, and he believes, has plenty of room for growth, as the world still needs heat and energy.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
For further study, here are two books that bring you the basic principles of Contrary Investing:
Navellier & Associates owns Apple Computer (AAPL), and Microsoft Corporation (MSFT) in some managed accounts. Gary Alexander does not own Apple Computer (AAPL), or Microsoft Corporation (MSFT) personally.
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
While America Gave Thanks, the World Was in Revolt
Income Mail by Bryan Perry
The Bullish Case for U.S. High Yield Bonds
Growth Mail by Gary Alexander
Beware Hot, Trendy Sectors (I Favor Unloved Essential Sectors)
Global Mail by Ivan Martchev
New Volatility Lows for 2023 Indicate a Coming Overdue Small Correction
Sector Spotlight by Jason Bodner
The Market Roller Coaster Starts Rising Again
View Full Archive
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About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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