Ever heard of the Nifty Fifty?
Even I’m not old enough actually to remember them at first hand. But when I first started work in the City – much longer ago than I care to remember – people still talked about them with reverence.
Nifty Fifty was a soundbite for 50 uber-popular 1960s and 1970s US ‘blue chips’ that were widely viewed as no-risk ‘buy and hold’ fast-growth stocks. They were the main drivers of the early-1970s bull market. Then everything went wrong in 1974.
Very interesting, you may say, but so what?
I believe that I’ve identified the 2018 equivalent of the Nifty Fifty. Sure, we’re talking just 25 top US shares this time. Hence the title of this article: 50 x 0.5 = 25.
But irrespective of the exact numbers, exactly the same fate could befall today’s elite group of stocks as well. That would spread carnage around the world’s equity markets, including the UK…
All’s (not) well that ends badly
The Nifty Fifty were first spotlighted by Morgan Guaranty Trust. They mesmerised both institutions and private stock holders for several years, shifting investment thinking from ‘value’ to a ‘growth at any price’ mind-set. Constituents included fast-food pioneer McDonald’s, early tech titans IBM, Texas Instruments and Digital Equipment, soft drinks maker Coca-Cola and growing store chain Wal-Mart.
“The Nifty Fifty’s rise didn’t spring from a typical market mania, such as the 1920s’ excitement over mass production or the 1990s’ blind zeal over the promise of technology. Instead, it was a change in the Wall Street zeitgeist”,says Chris Pummer for USA Today.
The Great Depression and World War II had a profound and long-term effect on US investors’ behaviour. Up into the 1950s, Americans played it safe with stocks. Risk-averse buyers preferred stable good yielders to earnings growth-driven plays.
But that attitude altered as US began to dominate the global economy. “A lot of the [1960s) build-up in the market was based on the perception of America’s growing power and strength”, says Manhattan College finance professor and Wall Street: A History author Charles Geisst. And the Nifty Fifty embodied that changed optimism. They became the byword for ‘buy and hold forever’ because there seemed no risk of losing money.
P/E ratios (prices divided by annual earnings per share) summed it up. By 1972, the P/E on the S&P 500 Index had climbed to 19 times. In itself, that was high enough, you might think. But it was nowhere near the Nifty Fifty. Here the average was a stratospheric 42x, according to University of Pennsylvania professor Jeremy Siegel.
Among the most overblown were Polaroid on a P/E of 91, McDonald’s on 86x, Walt Disney on 82x and Avon Products on 65x, notes Pummer.
In fact, that last sentence conveys one of the key points.
Where are Polaroid and Avon Products now?
Answer: Polaroid went bust in 2001. And Avon is but a shadow of its former self, making losses and valued by the markets at less than $1bn.
But these weren’t the only Nifty Fifty stocks to fall hugely out of favour. Others have since vaporised. In fact the 1973-74 bear market nuked the whole Nifty Fifty concept.
The Dow Jones Industrial Average fell 45% in just two years as the first of the 1970s oil crises hit, the US went into recession and inflation surged. Many Nifty Fifty stocks even did worse as they “were taken out and shot one by one”, said a Forbes columnist at the time. Xerox plunged 71%, Avon 86% and Polaroid 91%.
The net result was the end of “that period of naïve expectations for the future”, according to Geisst, as “the S&P 500 or the Nifty Fifty will make you rich, but they can also make you grey and die prematurely”.
Fast forward to 2018…and what do we find?
No more American Nifty Fifty. But now it’s a US Live 25 (OK: that description’s not brilliant, but I’m working on it. All contributions gratefully received!)
Here are the names as at end-2016: Apple, Microsoft, Alphabet, Cisco, Oracle, Johnson & Johnson, Amgen, Gilead Sciences, Qualcomm, Ford, Amazon, Merck, Pfizer, Coca-Cola, Intel, General Motors, Abbott Labs, PepsiCo, Dell, Procter & Gamble, Walgreens Boots Alliance, eBay, Eli Lilly, General Electric and Boeing.
P/E ratios for this group of stock are again looking very pricey. And here’s another aspect. 99% of America’s corporate sector is struggling cash-wise, notes S&P Global Ratings. In fact it’s losing the battle. Yet the top 1% – yes, you’ve guessed it, our Live 25 – is doing fine as “the divide between the haves and the have-nots continues to widen”.
A few figures: S&P Global analyses the monetary muscle of some 2,000 US non-financial corporate borrowers. The top-line numbers look fine: as at end-2016, in total these companies held a record $1.9 trillion in cash plus near-cash investments.
But here’s the rub: in 2016, the top 1% improved its aggregate cash position by $130bn to $1 trillion. So it owned more than half this cash hoard, nearly twice the $510bn it held just five years before, putting its cash-to-debt ratio at around 140%.
Contrast that with the worsening position of the other 99% of US companies. The top 1%’s figures are more than 8x better than for everyone else.
As at end-December 2016 the 99% held just $875bn in cash against a colossal $5.1 trillion of borrowings, leaving their cash-to-debt ratio at just 17%. That was the lowest level since the 16% seen in 2008. And the overall imbalance between cash and debt widened, with total US corporate borrowing growing by $350bn to $5.8 trillion.
Sorry. Stats overdose.
Yawn. Hate being swamped by them.
But you’re getting the big picture.
The US market has created a replacement for the Nifty Fifty – the Live 25. Despite being just 1% of the total number of American companies, it’s driving up the country’s equity indices across the board. And the FTSE 100 keeps rising as a result.
How long can it stay fine for the Live 25? That’s the huge question. But the clear message from 1973-74 is that it won’t be forever. And when the valuation of the Live 25 finally implodes, it’ll be tin-hat time all around the world’s stock markets.
S&P Global is due to publish its updated figures soon. Watch this space…