Why Defensive Stocks Have Disappeared

28:45Just so people understand how this all came about, it was defensive versus cyclical. Okay, so that's number one. And tech used to be considered cyclical, which I think we have all now come to the conclusion that actually know tech is some form of a consumer staple slash industrial, but it doesn't even matter. The original concept was, and this goes back to like Charlie Dow in the late 1800s, was that there was a cyclical side to American capitalism, industries that did better when the economy was growing faster. And to invest in those sectors or those industries was to make the bet that the economy will be better than expected.

29:28And the defensives were for portfolio managers who didn't have the option to swing to cash. So they had to be fully invested. So they would say to themselves, well, if I'm bearish on the overall outlook or I'm not seeing enough earnings growth to justify buying growth companies, then I'm going to shift the dollars that must own stocks into stocks that do well regardless of what's happening in the economy, defensive stocks like Hershey and Coca-Cola. And that was a very sound way of thinking about the market until we reached the point where every year dollars are being yanked away from fully invested stock picking managers in the mutual fund space.

30:14And more frequently appear those dollars more frequently show up in ETF portfolios. And people just have other options besides I'm going to rotate to defensive stocks. They can literally buy anything and they are. those i feel strongly the staple stocks just aren't built for this era hershey general mills like they're just the influencers know they're full of junky ingredients so they go on instagram and say don't don't buy this buy another brand although coca-cola new highs this summer yeah so i'll give you that so you know you can make you can make money these stocks um i'm trying to picture in my mind i'd love to hear what you guys think a scenario where that reverses how to how How did defensive stocks in their current incarnation go back to being 35 % of the S &P from 20 %?

31:04That's never going to happen. You would have to have a massive market crash in AI stocks. Recession and AI just completely sputtering for some reason, regulatory regulations or something like that. You'd have to ruin the entire AI story. Yeah, I agree. I also think the question here is how are investors categorizing in their own minds what a defensive stock is, right? Like is Netflix a defensive stock to somebody who says, look, no one's going to cut their Netflix subscriptions. It's like we're almost redefining what a defensive stock is over the past few years. Just these companies have compounded their capital at such high levels.

31:46Despite Fed that was on the fastest hiking cycle ever, despite 9 % inflation, despite everything. And so the defensives have actually gotten hit the entire time. So it's just a question of redefining what a defensive is. It's a great point. I've spoken with people who say Visa, MasterCard, and Amex are defensive because you still have to pay your bills. And more and more of your bills are being paid on credit cards. Therefore, they're raking in their fees no matter what the economy does. Um, I've spoken to people that point to like net, like the uncancelability of Netflix. Like, you know how bad things would have to get if you do not want to have TV, um, utilities, are they defensive or are they an AI play?

32:30Cause you can't really be both. You've got utilities making all time record highs selling at 15, 17 times earnings. Are those still defensive? Right. Would those be defensive if there's a crash in the AI theme? I doubt it. So I totally agree. We don't really know what's a defensive stock anymore, which is why I think that old paradigm kind of needs to go. And we need to just focus on industries more than sectors and companies more than industries if we're really trying to understand what's going on. Matt, you got a chart? I do have a chart. Yeah, John, can you throw up chart three? Awesome. All right, so I wanted to highlight this sort of market dynamic shift that's happening right now.

33:10And there's kind of this divergence where the S &P has recovered almost all of its loss from the peak in February. But the MAG-7 weight in the S &P has only recovered like half of its decline. And so I think this is kind of like a broadening story and also highlights that the MAG-7 has kind of been a drag this year. Matt, this is so good. Yeah. So for people that are listening, Matt's got the MAG-7 weight in the S &P 500, which peaked in early January and has now recovered, let's say, I don't know, 60 % of the decline versus the S &P 500, which is just 2 % away from its all-time high. And I've got a reason, my friends.

33:53John, throw my Apple chart on. I've used this chart in the past with Josh, but we are at an absolutely critical juncture for Apple. I'm looking at Apple divided by SPY. And for whatever reason, it has bottomed exactly where it is today in a meaningful way, in a meaningful way, three times previously. And I don't know if I suspect this holds or not. I really will not give an opinion because I just, you know, who the hell knows. But this is a big reason why Apple was the king, was the biggest stock in the market for the better part of the last 15 years. And it is relatively on the ropes. Is this bullish?

34:36That's a great question. Not for Apple. Is this bullish? for the S &P 500? I think this idea that the S &P is so over-concentrated will actually scare some investors away. So the question is, if the S &P's composition is starting to become less and less concentrated because of an Apple following or because, then I think it might actually encourage new investors. Historically, Michael Mobison did a post that shows empirically concentration is bullish. Like you be careful what you wish for. When you get a broadening out of the market, it usually happens in a bear market. Now it's not to say, it's not to say that that holds always and forever because we are experiencing Apple lagging for a long time, Amazon lagging for a long time, and you see the 493 coming up the rear.

35:25So who knows? But that's a really good question. Is it bearish or bullish or neither that Apple is relatively weak? It may just be leaving its peak dominance. I mean, that's what that chart tells me. It's like 40-year-old LeBron. You know, it's still there, but… Chart back on. Chart back on. So let me frame it this way. Will Apple ever make a new high relative to the S &P 500? I say no. I mean, they would have to just have like this killer… They're talking about foldable phones now. Like they're following the Chinese at this point. I don't know. They would have to have just some killer product cycle, and then it could happen.

36:05But Josh, what do you think? Will Apple ever make a new relative high to the S &P? like will Apple get back to where it was at the start of this year in terms of its size? It's, Oh, this is price chart. Will this chart ever make a new high? I don't think so. You know what? I'm going to say no. Tough call. I'm going to say no. The other, the other part of this with the weight is also alphabet. Cause that's having an issue too. Um, the, and then if I can play devil's advocate, If you inserted Broadcom into the MAG7, you know, or if you just – if we made a substitution here, that makes that chart a little trickier.

36:46But I'm in agreement with Matt. It's a good chart. It's just we have a rotation going on with what the big influences are now. So one of the good things that's going on that I just want to point out is that there is this tier beneath the mag seven, call it 30 stocks, that has just increased in market cap so dramatically over the last year. So I want to throw out like Oracle being a really great example of this. I want to throw out Uber, which everyone knows I'm long, but like this is a stock that had a$75 billion market cap like a year ago, maybe. It's$180 billion market cap now on its way to$200, I think.

37:31There are a lot of – CrowdStrike is a$500 stock now. There are a lot of stories of companies that have gone from$30 to$50 billion to$100 billion in market cap. and like we have to say that's a net positive. Absolutely. Matt, you're so excited. That the second tier of stocks exists. I'm so excited. Yes, I'm so excited. I have a chart that is kind of showing what you're saying here. All right, good. Because the look on your face is like you just f***ed a girlfriend and I'm sitting around the campfire telling you guys how much I love her. Show us the chart. So excited. Okay, chart four. Chart four.

38:08Okay. All right. So what I did here was I took all the S &P 500 constituents and grouped them into 10 deciles by market cap. So deciles 6 to 10 are the top half, the largest S &P 500 stocks. And deciles 1 through 5 are the smallest. And so, Josh, I then showed the contribution to the year-to-date return by each of these decile cohorts. so the bottom five that sells the smallest half of the S &P 500 is detracting 21 basis points to the year-to-day return and the larger half is contributing 192 basis points so the companies and the reason why I was getting excited is the companies that you're talking about they're in like that 8th, 9th decile they might not be the 10th but they're like right in there and that's been the sweet spot so good yeah I don't know is that like the snowflakes of the world or not even bigger than that maybe?

39:09Even - Trying to think like what would be in there? Like Oracle, for example. When you said Oracle, I think it would be in there. Cisco, definitely. Cisco's having an amazing year. Netflix, of course. Okay. So that, look, that's one of the definitive trends of the last, let's call it 10 years, is that size matters and large market cap stocks on average. have had better returns year in, year out than companies on the smaller end of the spectrum. And I don't know if that's an industry thing. You have a lot of small cap, like banks that can't get arrested or - Dude, it's a lot of - Disney, American Express, McDonald's, a lot of banks are in here.

39:54IBM is on fire. You know, this just blew off a light bulb in my head. There's an ETF that's coming out that will take out the top 100 names. By size? Yeah, so it's going to be like the S &P 200 to 500. I forget. It might have been iShares who did it. It's coming out later this summer. So if you want to make a contrarian bet or if you want to own the next tier, that would be the way to phrase it. You know what? That's a better expression of what you're trying to actually target than the equal weight. True. Yeah, it's like a spin on equally weighted. Yeah. Yeah, equal weight is like a mean reversion bet that the market will still do well, but that there'll be more participation from the rest of the market.

40:33Therefore, you want to downplay the mega market caps. But I don't like that idea as an investor. I understand it as a trade. I just, that's not for me. I do like the concept of like, these are, this is the next tier below the MAG7. And if you want to make a representative bet on the stock market, but negate the size of Microsoft and Nvidia. Like the S &P 150. This is how you would, this is, yeah. I sort of like that idea. Anyway, if somebody said, is that bullish or bearish? I would say bullish. I would also say this directly contradicts the people that were saying the only reason the market had a great year in 23 or in 24 was seven stocks.

41:14Well, it was true in 23. Right, but it's becoming less true and the market is still at record highs. True. So what are you going to say now? The influence is declining, which is not a bad thing. Well, the market cap is being redistributed. Yeah. It's going elsewhere. where it's, you know, it's not going everywhere, but it never will. And it's also just the disparity among those big names too, like Apple, we were talking about and Alphabet. Right. Okay. Love it. Great chart, Matt. Thank you. When you show that to advisors, that strikes me as the kind of thing that advisors would say, oh, this is a really, this actually helps me make the point I want to make to my clients when they ask me, why don't I just buy, you know, NVIDIA, Tesla, like, well, here, Here's a really good reason why there's a lot of money being made elsewhere, not just in the top decile.

42:08100%. And also just the benefits of diversification. The S &P is up 1.7 % year-to-date price return as of yesterday's close. But it's not evenly distributed among all of the members. So you got to buy the basket effectively to actually achieve the return. Okay. Love it. Who's got the next chart? You want me to roll in here? I don't know if one of you guys got it. Okay, John, on chart five, chart five, John. Okay, I want to stay with this market cap idea that we're talking about. We're going to go a little Wild West-y. So this is a lovely scatterplot of levered long single stock ETFs. Okay, so this is a three-year-old category in the world of ETFs.

42:51And if you're unfamiliar with them, what they do is just take a single stock like Apple or NVIDIA and put leverage on it, usually two times. On the x-axis is the inception date of all these funds and the y-axis, the size of the underlying today. And I point this out because levered single stock 1.0, the initial batch, we're all mag seven. In the last three to five months, they've gone crazy in terms of the size of the stocks that they're involved in now. We're talking three to$5 billion names. Dude, this is nuts. QBTS, what in the world? Archer Aviation, Upstart, D-Wave Quantum, them regetti lucid game stop tempest ai wait hold on hold on hold on hold on there's a there's a 2x etf for every one of these companies on here yeah and sometimes multiple right multiple issuers are involved somebody launched a 2x intel for like yeah yeah that i don't know what that was silly you got djt on here hymns right mara uh regetti and ion q the the quantum stocks need a 2x.

43:57They're not volatile enough. Yeah, exactly. Todd, are any of these tiny ETFs getting traction asset-wise? I can't imagine. There'll be some hits, but most of that's going to come price appreciation. The flows. Dude, I want to see the first one of these that ends up with more market cap than the stock it's based on. Oh, that's very... That's going to happen, right? Yeah, I don't see why that wouldn't be possible. It could happen with... It's probably not going to happen with like a micro strategy because that's already really big or strategy whatever we call it um but like something like a rocket labs or a rivian if one or like if one of those hits a trend and starts to really go it's still going to be small enough where you might see the betters um put more money into the 2x yeah like that's a very that could create operational problems i I don't know how I'm not jealous of the people having to deal with that.

44:54I'm going to tell you that's 100 % a buy signal short term and a sell signal intermediate term. Yeah. If you read the headline, IonQ's 2X ETF now has more money in it than the company's market cap. You just buy it. Ask questions later and then sell it really fast. There's more of these coming too. like real small cap stock because that's where the volatility is. Todd, you have any ideas that you're surprised don't exist?

45:30Man, that's a no. That's a Pineapple Express question. Right, Seth? If you were to launch an ETF, what would it look like? He would launch an old school Hollywood buffet. I mean, Hollywood. All you can eat for$30. How do you think the companies feel about these? Do you think they care? Do they know about them? Yeah. I'm sure they'd love it. There's probably somebody working at every one of these companies that, like, they have to distance. It's their job as an investor relations professional to make sure that they distance themselves. They want the Deagans. Deegan investors, we're open. I mean, like, this is crazy.

46:18Yeah. I think one of the things that's happened with ETFs is that they used to be more expensive to just let them exist. And because the costs have been driven so low, it's almost like you could have zombie 2X company ETFs that just live forever because nobody has a reason to need to shut them down. Yeah, so speaking of Hollywood, I think that a lot of these issuers who are smaller niche issuers take this Hollywood approach where you release 10 films in a year. Two or three of them are your winners. And then six or seven flop or, you know, they do better on eventually on demand and stuff like that.

46:57You know what I'm saying? The ETF industry has always been a spaghetti cannon. And I'm old enough to remember people in 2011 and 2012 being angry at all like ETF launches. I think at this point, nobody really cares. And now the costs are a fraction of what they used to be. So launch it. Who cares? See what sticks. Launch it and leave it. What's the difference? If you launch it, they might come. They may. Matt, what do you got? I've got a chart. Yeah, I know you do. Yeah, chart five, John. Could you throw? All right, awesome. All right, this chart, which comes from Exhibit A, is showing the performance of the S &P one year after at least 58 % of stocks hit a new four-week high.

47:41So this is kind of like a breath rust, right? And so we got this signal in the middle of the just face-ripping rally we had off the April low. And you'll notice across the board, one year later, the S &P has never been lower. And the win rate, in other words, the number of instances that saw a higher market one year later is 100%. The average return is 19%. So it's great for returns. 12 months later, anytime the stock market has hit 58 % of companies making a four week high, a year later, the average return is 19 % and it's never negative. And think about when these events happen. Look at all the dates in here.

48:25They're all bottoms. And they cluster. Did you notice that, Matt? Like a lot of them are around these bear market lows. Yeah, they happen typically after a large drawdown and coming out of that drawdown. And it's exactly kind of what we had. Actually, but there's two that stand out to me because I lived through them. One of them is March of 2003. That was the end. That was the end of the dot-com meltdown slash Enron slash 9-11 bear market. And I actually remember that bread thrust because I was working at a retail broker dealer and we were selling biotech stocks like these little shit small cap biotech companies that don't even exist anymore.

49:11But they were doubling and tripling like we were selling them because people were buying them. Right. And all of them worked out like I remember that summer was just a field day. No matter what you bought, it went up. I didn't know the breadth data that you're showing me here, but that one stands out. The other one is, one more time, same thing July of 2009. I don't know specifically what happened on July 23rd of 2009. I'll take your word for it. There was a big bread thrust. But effectively, that's when the market is making its recovery from the March low. It's still in the midst of this massive rally where every stock is going up.

49:52I think that one was just like, there's no sellers. You know why this is such a great chart? I'm just eyeballing some of these. Like, these are the type of dates that most investors, especially had they gotten to cash, would never buy. Like July, 2009, you're like, oh, I can't buy now. We're a double off the bottom. Yeah, we're 40 % off the lows. Right? Like, so I'm looking at like December 2023, for example. And like, that was questionable. I feel like you could have bought that. That looked like breakout was coming. But other than that, who the hell was excited to buy June of 2020? It was like, what?

50:23Why are we up so much from the lows? You're telling me to buy now? No way. I'm going to wait and see. We're going to retest. Like this bounce doesn't make sense. Same thing with July of 2022 with inflation screaming. But guess what? The market isn't dumb. And when you see this number of stocks making a 52-week high, you just shut up and you don't worry about what's going on and you buy them. Yeah, I think they don't mark the lows too. They're like three months later. By definition. By definition, because that's enough time to reach 58 % of stocks hitting a four-week high. Like that's not going to happen within a week of a 20 % bear market low.

51:03So all of these are like a few months after the recovery has already started and they will not sell signals. So my point is you could convince somebody to catch a falling knife, right? Like if you're like, oh, whatever, it can't keep going down forever. it's harder to convince somebody to buy that 58 % because by that time, Josh, to your point, you're three months late and you're already 30 % off the lows. I missed it. I missed it. No, you didn't. The, the, the, the chart to me, I mean, if I had to pick one measurement to like use all the time and get rid of everything else, it would be that data, 20 day high data.

51:38Cause it's about probabilities. The probabilities are way in your favor and it signals durability too. Yeah. That's some of my favorite data. When you see a giant washout followed by the bread thrust, that's it. The bottom is usually really good. The other thing is you could be wrong. So like in other words, all right, so right now, so as of the middle of May, 58 % of S &P 500 companies were hitting a four-week high. So like you really have like a short-term rally at minimum. That's all you knew you had, right? But looking at that data like, no, guys, this has always worked in the past. With the caveat, one time it might be different.

52:21But is that the way you want to invest? You want to bet on extreme outliers? It won't work forever. You're 100 % right. But the odds are the odds. Take them. I'm also appreciative that, Matt, you put a little asterisk on there that it's only the first instance over a 30-day period. So you're not cheating the data. Yeah, yeah. Sometimes like, so sometimes you'll have, so May 12th could have been 58 % hit four week high. And then May 13th, it could still be 58%. Just, I'm just taking the first. You're not double counting the instance. Because then what happens, if you double count the instance, it will skew the average.

53:01And it's not, that's not the right way to show the data. That's the work. That's data integrity. Man child chart kit. Very good point, Todd. Very good point. All right. We did match charts. Do we have any more? I can give you one more to whatever you want. Yeah, throw it up. John, chart three. This is a sore subject for me. So we talked about the new high data expanding for the S &P. We talked about market cap. Here are flows to small cap ETFs because it's just been awful. Freaking awful. God. Going on. We've had some runs in there, but it's been a four-year bear market for small caps. Maybe the April low is the purge, but I just think it's interesting that over the last few months.

53:42Wait, wait. Let me, for the listeners, this is the rolling month, the rolling three-month sum of all of the money that has either come into or left small-cap ETFs. So what are these ETFs? The tickers or just in general? Is it IWM? IWM, IJR, CAF, IWO. I think it's going to be small-cap growth, if I'm remembering correctly. There's a few hundred of them in this. So this is now at an extreme that we haven't seen since the end of 2006. Yeah, which is not a great harbinger. Which is the start of the mortgage crisis. So I have to tell you, this is the chart. So on its surface, I think all of us would agree, chart off.

54:28On its surface, all of us would agree, this is the mother of all contrarian buy signals. Okay? Hopefully. But the biggest asterisk also, market structure has changed. It's not that there's no money going into small cap companies on the equity side. It's that most of the money now, new money, going into small cap companies is going into venture funds and private equity funds. and those companies that are in receipt of these equity investments do not trade, don't have tickers, don't appear in these ETFs. Like if we don't, I don't know how to do this. I don't know how to like get that data and harmonize it with the publicly traded small cap, but there is no reason to be a publicly traded small cap.

55:18And many companies that in prior generations would have been in the small cap index are very easily, very happy, very seamlessly raising money in the private market, and they will come public as mid-caps or large-caps. And we can't pretend that that's not happening. I've had a few people tell me they took away their small caps and just put it in high-yield bond instead. Similar return profile, volatility, all that. Just put it in the toilet. Instead of, oh, you're going to buy a small... I mean, that's as bearish as it is right now in small-cap land. And it just like on its surface, you just want to say, I don't care if it takes three years.

55:59I'm going to make a ton of money on this. Small cap stocks. Look at Cheesecake Factory. I hear that's the new jam. When was the last time you went to one? The only thing that forces a company to be a small cap stock is not having an AI strategy. Well, Cheesecake Factory, guess what? Yeah. Like if you want to graduate from small cap to mid cap, if you're Cheesecake Factory, tell Wall Street how you're using AI. To blah, blah, blah, blah, blah. And that's your best shot right now. Mint chip cheesecakes. I own a few small caps. And when I talk about them publicly on TV, I'm the top news article for three months.

56:42Because nobody else has anything to say. Yahoo Finance is not publishing the analyst commentary on these stocks. the only outlet that i ever see with an article is either seeking alpha or benzinga on on some of these tickers like they almost don't exist it's incredible seeking alpha could have been me like junior year of college so uh like literally it could have been a very young chart kid matt um doing a post all right guys the charts were unbelievable uh let's do final thoughts and then and then we'll say goodbye. Anything? Was I doing what am I liking right now? Give me a final thought on the market.

57:23Buy or sell. Boil it down for us, dude. The Titan documentary on Netflix. I'm a buyer of that. What is that? On the submersible that just vanished. Oh, that keeps coming in my algorithm. They think I'm going to like it. Should I watch it? I didn't know it was made out of carbon fiber. Okay. Me either. They have footage of some other of their dives, and you can hear the ship basically popping, foreshadowing what happens. It's pretty spooky. Yeah, I'm going to stay with jet skiing. Chart Kid, Matt, any parting thoughts? Yeah, I think that markets are healthier than they were at the February high.

58:00There's obviously some rotation away from some of the MAG-7 names and into other areas. I think that's overall good. Getting some breath thrust in the data. I just wouldn't be bearish personally. I like it. Michael? I'll give a plug for the Unlocked. Phil Huber and I did 50 minutes today on the mega trend of alternative asset managers infiltrating wealth managers. It was a good one. That's over at the Unlocked. That's the Unlocked channel on YouTube. When is that going out? Is that out now? It was out live this morning at 11. You can see the replay. All right, I'm all in. All right, guys. Thank you so much.

58:36Thank you so much to Todd Sohn of Strategas and to ChartKid Matt Cermonaro of Ritholt's Wealth slash Exhibit A. Wonderful to have you guys. Thanks for doing this. And to all of you out there, thanks for listening. And we'll talk to you soon.

59:06Thank you.