Raphael Stevens

Think of America’s stockmarket. What is the first firm that springs to mind? Perhaps it is one that made you money, or maybe one whose shares you are considering buying. If not, chances are you are thinking of one of the big hitters—and they don’t come much bigger than the “magnificent seven”.Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla are Wall Street’s superstars, and deservedly so. Each was established in the past 50 years, and five of them in the past 30. Each has seen its market value exceed $1trn (although those of Meta and Tesla have since fallen, to $800bn and $700bn respectively). Thanks to this dynamism, it is little wonder that America’s stockmarket has raced ahead of others. Those in Europe have never produced a $1trn company and—in the past three decades—have failed to spawn one worth even a tenth as much. Hardly surprising that the average annual return of America’s benchmark S&P 500 index in the past decade has been one-and-a-half times that of Europe’s Stoxx 600.There is just one problem with this story. It is the hand-waving with which your columnist cast the magnificent seven as being somehow emblematic of America’s entire stockmarket. This conflation is made easily and often. It is partly justified by the huge chunk of the S&P 500 that the magnificent seven now comprise: measured by market value, they account for 29% of the index, and hence of its performance. Yet they are still just seven firms out of 500. And the remaining 98.6% of companies, it turns out, are not well characterised by seven tech prodigies that have moved fast, broken things and conquered the world in a matter of decades. Here, then, is your guide to the S&P 493.Most obviously, having discarded the tech behemoths, our new index now looks substantially older. Consider its biggest companies. At the top of the list is Berkshire Hathaway, an investment firm led by two nonagenarians, and Eli Lilley, a pharmaceuticals-maker established in the 19th century by a veteran of America’s civil war. Further down is JPMorgan Chase, a bank that made its name before the founding of the Federal Reserve. That is not to suggest that these firms do not innovate. All of them, by definition, have remained highly successful, even if none has crossed the $1trn threshold. Whippersnappers, though, they are not.image: The EconomistAs a result of this maturity, the S&P 493 is less susceptible to the market’s ever-changing mood (see chart). This is a double-edged sword. On the plus side, it offered protection during the crash of 2022. The more established business models of S&P 493 companies started the year with less hype than those of the magnificent seven, leaving them less vulnerable when the hype duly evaporated. Meanwhile, a smaller proportion of their value came from the promise of distant future earnings—where present value fell dramatically as interest-rate expectations soared. The net effect was that, while the magnificent seven together lost 41% of their value, the S&P 493 lost just 12%.This year, however, the tables have turned. On the face of it, the old-timers ought to have done well, since the American economy has remained remarkably buoyant. This, combined with enthusiasm concerning the potential of artificial intelligence to juice their profits, led to a stellar recovery for the magnificent seven. In the first ten months of the year their share prices rose by 52%, nearly erasing the losses of 2022. By contrast, the value of the S&P 493 fell by 2%.What to make of this bifurcation? One conclusion is that America’s tech giants have become overvalued and must eventually face a crash. Another is that, just as share prices have diverged, so too will the companies’ sales and profits, meaning that the magnificent seven really are about to leave the dinosaurs in the dust. Investors seem to choose between these hypotheses largely according to their own temperament, since traditional valuation measures such as the price-to-earnings ratio, which for the magnificent seven is roughly double that for the S&P 493, lend support to both camps.A third conclusion, now aired increasingly often, is that the S&P 500’s domination by seven stocks which are so different from the rest means it is no longer a good benchmark. That is not quite right. Many people invest in funds tracking the index precisely so they can capture the gains of the winners without having to care about its composition. Still, if you want to know what America’s stockmarket really looks like, avoid the headline index. Look at the S&P 493. ■ More

At first glance, Argentina faces a stark choice in the second round of its presidential election on November 19th. Sergio Massa, the current finance minister whose government is presiding over inflation of 138% and a bizarre system of various official exchange rates, is facing Javier Milei. Mr Milei is a libertarian who says he wants to tear down the system, borrowing ideas from Friedrich Hayek, Milton Friedman and other free-market economists.Yet whoever wins, reformist Argentines doubt the country will truly change. In all likelihood, Mr Massa would double down on money-printing; he has little interest in dismantling the system of patronage that makes sustained growth impossible. Mr Milei, by contrast, would have little support in Congress. He has no experience of implementing policy. Many of the market-oriented economists sympathetic to Mr Milei, and even those who advise him, have surprisingly vague ideas about what Argentina needs to do to improve its economy. The country feels stuck.image: The EconomistArgentina is an extreme example of a wider trend. The world has forgotten how to reform. We analysed data from the Fraser Institute, a free-market think-tank, which measures “economic freedom” on a ten-point scale. We defined “daredevil economics” as when a country improves by 1.5 points or more—a quarter of the gap between Switzerland and Venezuela—within a decade, therefore indicating that liberalising reforms have been undertaken. In the 1980s and 1990s this was common, as countries formerly in the Soviet Union opened up, and many deemed unreformable, such as Ghana and Peru, proved they were in fact reformable (see chart 1). Politicians changed foreign-trade rules, fortified central banks, cut budget deficits and sold state-owned firms.In recent years just a handful of countries, including Greece and Ukraine, have implemented reforms. And in the decade to 2020 only two countries, Myanmar and Iraq, improved by more than 1.5 points. The same year a paper by economists at Georgetown and Harvard universities, as well as the imf, looked at structural reforms, and found similar results. In the 1980s and 1990s politicians across the world implemented lots. By the 2010s reforms had ground to a halt.Daredevil economics has declined in popularity in part because there is less need for it. Although in recent years economies have become less liberal, the average one today is 30% freer than it was in 1980, according to our analysis of the Fraser Institute’s data. There are fewer state-run companies. Tariffs are lower. Even in Argentina, telecoms and consumer-facing industries are better than they once were.But the decline of daredevil economics also reflects a widely held belief that liberalisation failed. In the popular imagination, terms such as “structural-adjustment plan” or “shock therapy” conjure up images of impoverishment in Africa, the creation of mafia states in Russia and Ukraine, and human-rights abuses in Chile. Books such as Joseph Stiglitz’s “Globalisation and its Discontents”, published in 2002, and Naomi Klein’s “The Shock Doctrine”, in 2007, fomented opposition to the free-market “Washington consensus”. In Latin America “neoliberal” is now a term of abuse; elsewhere, it is rarely used as an endorsement. Many Argentines argue that the country’s attempts to liberalise its economy in the 1990s provoked an enormous financial crisis in 2001.Today, international organisations like the imf and the World Bank are rather less interested in daredevil economics than they once were. In an edition of its “World Economic Outlook” published in October 1993, the imf mentioned the word “reform” 139 times. In its latest edition, published exactly 30 years later, the word appears a mere 35 times. These days America has a new consensus, which takes a sceptical view of globalisation’s benefits, prioritises domestic interests over international ones and favours large-scale subsidies in order to speed up the green transition and bring home manufacturing. With less chivvying from the West, governments elsewhere feel less pressure to reform their own economies. Argentina’s free-marketeers in the 1990s drew on deep links with America. Fewer such connections exist today.In for a shockYet the view that daredevil economics failed does not stand up to scrutiny, even if projects often produced short-term pain. In the 1990s the three Baltic countries liberalised prices and labour markets. This allowed them to move from membership of the Soviet Union to membership of the euro within 25 years (see chart 2). In the 2010s Greece implemented many reforms demanded by the imf and European authorities. Inward foreign direct investment is now soaring, and this year Greece’s gdp is expected to grow by about 2.5%—one of the strongest rates in Europe. Not long ago many argued that China had rejected daredevil economics and succeeded. Recent economic weakness, including a property market in turmoil under President Xi Jinping, casts doubt on this notion.Indeed, a growing body of research suggests that daredevil economics has largely achieved its aims. A paper by Antoni Estevadeordal of the Georgetown Americas Institute and Alan Taylor of the University of California, Davis studies the effect of liberalising tariffs on imported capital and intermediate goods from the 1970s to the 2000s, finding that the policy raises gdp growth by about one percentage point. Ten years after the beginning of a “reform wave”, gdp per person is roughly six percentage points higher than could have reasonably been expected otherwise, according to a paper published in 2017 by economists at the European Central Bank, which analysed 22 countries of different income levels from 1961 to 2000.Meanwhile, a paper published in 2021 by Anusha Chari of the University of North Carolina, Chapel Hill and Peter Blair Henry and Hector Reyes of Stanford University finds positive impacts from a wide variety of reforms in emerging markets, from stabilising high inflation to opening capital markets. For instance, trade liberalisation tends to raise the average growth rate of gdp over a decade by more than 2.5 percentage points a year. In another paper, focusing on Latin America, Ilan Goldfajn, president of the Inter-American Development Bank, and colleagues acknowledge that growth has been disappointing, but contend that “without some subset of the Washington consensus policies, it would have been difficult, if not impossible, to achieve macroeconomic stability and to recover access to foreign financing in the late 1980s and early 1990s.” Other research has found faster growth in Africa since 2000 among reforming countries.In most places where reforms appear to fail, the problem has been lack of commitment. Take Ukraine, where even before covid-19 and Russia’s invasion gdp per person was lower than when the Soviet Union collapsed. By the early 1990s it was clear that the government was not taking daredevil economics seriously. A memo written for the World Bank in 1993 by Simon Johnson and Oleg Ustenko, two economists, noted that “only a tougher and more radical set of policies can avert hyperinflation, but no political leader seems willing to adopt these measures.” What brought Argentina down in 2001 was not daredevil economics, as is commonly assumed. It was persistently large budget deficits.Perhaps Mr Milei will prove his doubters wrong. Perhaps he will win the election and then implement sensible economic reforms. This would include liberalising trade and making it easier for Argentina’s bosses to hire and fire. Doing so would help the country enormously. It would also demonstrate to the rest of the world a path forward. Daredevil economics may be disruptive, but it pays off. ■ More

Often one of the central bank’s bigger proponents for tighter monetary policy, Mester, 65, will reach mandatory retirement as she will have served in her current position for 10 years come June of next year.
The vacancy comes at a time when the Fed has pushed for greater diversity among its governing body.

The Cleveland Federal Reserve launched a search Wednesday for its new leader, after current President Loretta Mester retires in mid-2024.
Often one of the central bank’s bigger proponents for tighter monetary policy, Mester, 65, will reach mandatory retirement as she will have served in her current position for 10 years come June of next year.

A committee comprised of Cleveland Fed board members will conduct the search. The vacancy comes at a time when the Fed has pushed for greater diversity among its governing body.
Heidi Gartland, deputy chair of the district’s board, will lead the effort to replace Mester.
“President Mester’s strong leadership over the past decade has positioned the Cleveland Fed as an important resource to the community and the nation,” Gartland said. “We are committed to finding a new leader who can ensure the Bank continues to meet the high standard that President Mester has set.”
Whomever leads the Cleveland Fed will get a vote in 2024 on the central bank’s rate-setting Federal Open Market Committee.
In her most recent speech, Mester said she thinks the Fed may need another interest rate hike before the end of the year as it seeks to get the inflation rate back to 2%.

Don’t miss these stories from CNBC PRO: More

HSBC on Wednesday said it is launching custody services for the safe storage of tokenized securities, digital assets that represent regulated securities like bonds.
The bank is the latest institution to embrace digital asset custody, after U.S. banking giant BNY Mellon announced a similar move in 2021.
HSBC is “seeing increasing demand for custody and fund administration of digital assets from asset managers and asset owners, as this market continues to evolve.”

HSBC is the largest bank in Europe by total assets.
Nicolas Economou | Nurphoto | Getty Images

HSBC on Wednesday announced it will offer custody services for tokenized securities, making the British bank the latest major institution to embrace digital assets.
HSBC is using technology from Swiss crypto custody firm Metaco, which was recently acquired by blockchain startup Ripple, to store bonds and other securities.

In a press release, the bank said that the service would complement its HSBC Orion platform for issuing digital assets, as well as a recently-launched offering for tokenized physical gold.
HSBC will use Harmonize, Metaco’s platform for institutions, which “helps unify security and management of digital asset operations,” according to the press release.
HSBC is the latest institution to embrace digital asset custody, after U.S. banking giant BNY Mellon announced a similar move in 2021.
Tokenized securities are effectively regulated assets, like bonds and equities, in the form of tokens issued on a blockchain.
In turn, a blockchain can be considered a shared ledger on which assets are recorded digitally. The technology served as the foundation upon which bitcoin was built, but its applications in the banking world are very different to those of bitcoin and other cryptocurrencies.

In the case of banks, these institutions are leveraging blockchain for payments, trading, and other purposes, often without a digital token being involved. Banks are finding utility in tokens by digitizing equities, bonds and other assets.
HSBC is “seeing increasing demand for custody and fund administration of digital assets from asset managers and asset owners, as this market continues to evolve,” Zhu Kuang Lee, chief digital, data and innovation officer for securities services at HSBC, said in a statement.
Metaco CEO Adrien Treccani told CNBC via email that the partnership reinforces “continued momentum working with top tier financial institutions.”
“Financial institutions are ready to scale digital assets pilots to real use cases around custody, issuance, trading and settlement of tokenized assets, and in so doing, unlocking economic benefits and new revenue streams.”
It marks another step from HSBC toward embracing digital assets. The bank, which holds about $3 trillion in assets globally, already lets its Hong Kong clients trade in bitcoin and ether exchange-traded funds. More

Visitors around the Charging Bull statue near the New York Stock Exchange, June 29, 2023.
Victor J. Blue | Bloomberg | Getty Images

The S&P 500 is up 14% this year, but just eight days that explain most of the gains. 
If you want a simple indication of why market timing is not an effective investment strategy, take a look at the data on the S&P 500 year to date.  

Nicholas Colas at DataTrek notes that there have only been 11 more up days than down days this year (113 up, 102 down) and yet the S&P 500 is higher by 14% year to date. 
How to explain that the S&P is up 14% but the number of up days is about the same as the down days?  Just saying “there’s been a rally in big cap tech” does not quite do justice to what has been happening. 
Colas notes there are eight days that can explain the majority of the gains, all of them related to the biggest stories of the year: big tech, the banking crisis, interest rates/Federal Reserve, and avoiding recession: 
S&P 500: biggest gains this year

January 6         +2.3%  (weak jobs report)
April 27           +2.0%  (META/Facebook shares rally on better than expected earnings)
January 20      +1.9%   (Netflix posts better than expected Q4 sub growth, big tech rallies)
November 2    +1.9%  (10 year Treasury yields decline after Fed meeting)
May 5              +1.8%   (Apple earnings strong, banks rally on JP Morgan upgrade)
March 16         +1.8%  (consortium of large banks placed deposits at First Republic)
March 14          +1.6%  (bank regulators offered deposit guarantees at SVB and Signature Bank)
March 3             +1.6%  (10-year Treasury yields drop below 4%)

Source: DataTrek

The good news: those big issues (big cap tech, interest rates, avoiding recession) “remain relevant now and are the most likely catalysts for a further U.S. equity rally,” Colas says. 
The bad news: had you not been in the markets on those eight days, your returns would be considerably worse. 
Why market timing does not work 
Colas is illustrating a problem that has been known to stock researchers for decades: market timing — the idea that you can predict the future direction of stock prices, and act accordingly — is not a successful investing strategy. 
Here, Colas is implying that had an investor not been in the market on those eight best days, returns would have been very different. 
This is not only true for 2023: it is true for every year. 
In theory, putting money into the market when prices are down, then selling when they are higher, then buying when they are low again, in an infinite loop, is the perfect way to own stocks. 
The problem is, no one has consistently been able to identify market tops and bottoms, and the cost of not being in the market on the most important days is devastating to a long-term portfolio. 
I devote a chapter in my book, “Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange,” to why market timing doesn’t work. 
Here’s a hypothetical example of an investment in the S&P 500 over 50 years.
Hypothetical growth of $1,000 invested in the S&P 500 in 1970
(through August 2019)

Total return                                 $138,908
Minus the best performing day $124,491
Minus the best 5 days                $90,171
Minus the best 15 days             $52,246
Minus the best 25 days             $32,763

Source: Dimensional Funds 
These are amazing statistics. Missing just one day — the best day — in the last 50 years means you are making more than $14,000 less. That is 10% less money — for not being in the market on one day. 
Miss the best 15 days, and you have 35% less money. 
You can show this with virtually any year, or any time period. This of course works in reverse: not being in the market on the worst days would have made returns higher. 
But no one knows when those days will occur. 
Why is it so difficult to time the market? Because you must be right twice: you must be right going in, and going out.  The probability you will be able to make both decisions and beat the market is very small. 
This is why indexing and staying with the markets has been slowly gaining adherents for the past 50 years. The key to investing is not market timing: it is consistent investing, and understanding your own risk tolerance. More