17 Feb 17th February 2025

Index Movement Last Week

S&P500	+1.5%
Nasdaq	+2.9%
Aussie All Ords	+0.5%

The big news last week was US inflation which surprised to the upside.

As far as headline numbers went, CPI rose 0.5% MoM versus +0.3% estimated (+3.0% YoY versus +2.9% estimated). Core CPI rose 0.4% MoM versus +0.3% MoM estimated (+3.3% YoY versus +3.1% estimated). That worked out to a 5.5% annualised rate in the month for core prices, which was the fastest advance since April of 2023. Core CPI appears to be stabilised above 3% YoY as shown below.

Which probably means the Fed is on hold with interest rates for quite some time. In fact, I wouldn’t be surprised to see no more cuts this year.

This news obviously pushed up interest rates. How did equity markets react?

They barely responded at all because we have all seen this movie before. Looking at the graph tells you what you need to know.

The monthly number (blue line) is up and down like a yo-yo so too volatile to draw conclusions from. So we all ignore that and just look at the red line. Which is flatter than the delivery of my jokes so nobody cares.

The Fed thinks rates are restrictive now so stocks will continue to shrug off readings like this until they change their view.

Move along. Nothing to see here.

Last comment before we move onto the important things…….

My gut feel says we are about to have a nice little run here. I think March is going to be good. Get yourself positioned for it.

Stocks or ETFs

This is an argument as old as Jack Bogle (Google him to see who he is)

It is a well known fact that around 90% of fund managers underperform the index each year. The 10% that do outperform generally change each year too.

Which means that basically, no-one can consistently beat the index.

Jack decided, well, if you can’t beat the index why not just invest in the index? And Vanguard was born.

There are some very good reasons for just buying an index ETF over buying individual stocks. The fact you can’t expect to beat the index being the main one.

One of the reasons why beating the index is so hard is because the index goes through a natural rebalance that removes poor performers and puts more weight on high performers. It does this by market cap weighting each stock in the index.

Buying an index ETF means someone else is doing this part for you every day. Adding to your winners and taking away from your losers. That is pretty sweet.

For most investors, I think buying an index ETF is the best thing they can do.

But we aren’t here to be most investors, we are here to be the best investors.

I’m sorry Jack, you can outperform the index with individual stocks. I will show you how.

There is a lot of talk about how Apple, NVidia, Microsoft, Amazon, Alphabet, Meta and Tesla make up such a large part of the index. 30 percent of the S&P500 and 43 percent of the Nasdaq100 to be precise.

All these names are leaders in their field, with global sales and massive cash flow.

So instead of buying the index, why not buy these seven instead.

Below is a table that averages the yearly returns of these seven names. You can do the same buy buying the same dollar value of each one.

What this says is, owning these seven during bull markets is better than owning the index. But worse in bear markets. It is basically just a more volatile index.

But check out that out-performance!

You could do this easily. In fact, I think I will personally.

In doing so I accept it is going to be more volatile than owning the index. But that is the price to pay for such big outperformance.

Could this go wrong? Yes of course. But because they are such a big part of the index, for the index to gain and these seven to lose, would need something quite exceptional.

If you believe we are in a Bull Market then there is a very high chance owning just these seven names would be better than owning the index.

I’m going to be rebalancing my own portfolio tonight.

Commonwealth Bank

I do enjoy waiting for CBA’s profit announcement. And wow, look at that growth!

Last year profits of $5.02bn and this year they have managed to grow it to $5.13bn

That is an annual growth rate of 2.3%!

That’s lower even than inflation, so in real terms it is going backwards.

And what are investors willing to pay for this negative real growth? A PE of 26.

That’s in the realm of Big Tech. META, for example, trades on a PE of 27.

In META’s most recent announcement they grew earnings from $5.33 per share in December 2023 to $8.02 per share in December 2024.

That is 50% growth.

Why oh why would you pay the same multiple for a company growing at 2.3% per year as another growing at 50%?

Australian investors will always astound me.

I suspect it is more to do with our Superannuation Guarantee and the big superfunds not knowing where else to put it than some sort of real valuation analysis.

The CBA dividend announced was $2.25. That is 4.7% higher than last year so you income investors can rest assured at least it’s at least keeping pace with inflation

Even adding in the franking credits you only get to a yield of 4.2% for the year.

Why take stock market risk for a 4.2% yield when you can go risk free term deposit around 5%?

I have never understood the CBA share price and it looks like nothing is going to change in 2025. I still don’t get why anyone would buy this rubbish.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.