“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it […] The post A Tale of Two Economies appeared first on Lazy Man and Money.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
Who would have guessed that Charles Dickens predicted this exact moment some 166 years ago? The best and worst of times part is famous, but I had never read the rest (or A Tale of Two Cities itself). I included the rest because it seemed to be a fit for the divisiveness of the political moment. There is no in-between, which has us in the middle of a government shutdown where there isn’t even a conversation of compromise.
I’m going to focus on the economy, which is having its best and worst of times. There are actually multiple different economies behaving this way right now. The personal finances of the people in the top tier (say 10%) continue to get richer and richer. The people in the bottom half (and maybe more) are getting stretched more and more. This has been referred to as the K-shaped economy, because of how the two lines in the letter diverge from the center.
There has been a lot written about that, and I even referred to it in my last article. It’s worthy of getting all the focus. Yet, I wanted to write about another kind of “best and worst times” economy, the economy of corporate America. If you are a casual follower of financial news, you have probably read about how AI is dominating the stock market. Around 37% of the S&P 500 comes from the top nine companies. People think they are getting diversification if they invest in those 500 companies, but it isn’t very diverse. If you invest in Vanguard’s Total Market Index (VTI), which covers more than 3500 companies, it isn’t much better. The same nine companies add up to 31% of that index. That’s because these indices give bigger companies more weight.
It’s so extreme that billionaire hedge fund manager Ray Dalio says that America’s economy depends on 1% of workers. He also says that leaves about 60% of American workers unproductive and struggling.
Similarly, Mark Zandi of Moody’s Analytics says two states are key for the economy, California and New York. They are the tech and financial hubs that are driving everything. Nearly half of the states in his analysis are in a recession.
Since these big companies are driving almost all the growth of this bull market, they are part of the K that’s going in the right direction. However, there are a lot of companies that are taking the K path down. Target is down 35% over the last year. Chipotle is down 42% (including getting crushed today after last night’s earnings). Procter & Gamble is down 10%. I could go on. The S&P 500 is up 18% for the year, but all these big companies in it are down.
That covers some of the bigger companies, but small companies are having big problems too. CNBC explains how tariffs are crushing small companies. Those companies are too small to make the news, but I bet they matter a lot in their local communities.
Final Thoughts
I am not comfortable in this economy at all. Sure, the bottom line shows that my portfolio is doing extremely well. It feels like the emperor is wearing no clothes. I truly believe in the AI revolution – I am the first to sing its benefits. I don’t think building AI infrastructure is a long-term economic nirvana. We’re still going to need those consumer staple businesses that steadily make money.
I’ve written this a lot over the past few years, but it is worth giving your portfolio a look. Maybe if you have a lot of S&P 500, consider an equal-weighted fund or a high-dividend fund. Most of the big technology companies don’t pay dividends, so they often contain old, stodgy businesses that have stood the test of time.
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