“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 age of faith, it was the age of disbelief, 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 Part of Time is famous, but I’d never read the rest (or A Tale of Two Cities itself). I included the rest because it seemed to fit the divisive nature of the political moment. There is no middle ground, leaving us in the middle of a government shutdown, where there is not even a compromise.
I’m going to focus on the economy, which is going through its best and worst times. There are actually several different economies that are currently behaving this way. The personal finances of the people in the top layer (say 10%) are becoming increasingly wealthy. The people in the bottom half (and perhaps more) are becoming more and more stretched. This became the K-shaped economybecause of the way the two lines in the letter diverge from the center.
Much has been written about this, and I even referenced it in my last article. It’s worth getting all the attention. Still, I wanted to write about a different kind of “best and worst of times” economics: the economics of corporate America. If you’re a regular follower of financial news, you’ve probably read about how AI is dominating the stock market. About 37% of the S&P 500 comes from the nine largest companies. People think they get diversification if they invest in those 500 companies, but it is not very diverse. If you invest in Vanguard’s Total Market Index (VTI), which covers more than 3,500 companies, things don’t get much better. The same nine companies together account for 31% of that index. That’s because these indices give larger companies more weight.
It’s so extreme that a billionaire is a hedge fund manager Ray Dalio says the US economy depends on 1% of workers. He also says that about 60% of American workers are unproductive and in trouble.
Similarly, says Mark Zandi of Moody’s Analytics two states are crucial to the economyCalifornia and New York. They are the technological and financial centers that drive everything. Nearly half of the states in his analysis are in recession.
Because these big companies are driving almost all of the growth in this bull market, they are part of the K that is moving in the right direction. However, there are many companies following the K path. The target has fallen by 35% in the past year. Chipotle is down 42% (including today’s crush after last night’s gain). Procter & Gamble is down 10%. I could go on. The S&P 500 is up 18% this year, but all these big companies in it are down.
That applies to some of the larger companies, but small companies also have big problems. CNBC explains how tariffs crush small businesses. Those companies are too small to make the news, but I bet they are of great importance in their local communities.
Final thoughts
I don’t feel comfortable at all in this economy. Certainly, the end result 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’m the first to sing about its benefits. I don’t think building AI infrastructure is a long-term economic nirvana. We still need consumer goods companies that make money steadily.
I’ve written this a lot over the years, but it’s worth checking out your portfolio. If you have a lot of S&P 500, you might want to consider an equal-weighted or high-dividend fund. Most big tech companies don’t pay dividends, so they often contain old, stodgy businesses that have stood the test of time.
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