Gold Vs. S&P 500, Tesla & QQQ

By in
Gold Vs. S&P 500, Tesla & QQQ

Two topics today – gold and Tesla:

#1: A look at the relative performance of gold versus the S&P 500. First, an observation: if you just use single date starting points you can paint gold as either hero or zero in terms of its relative performance to US stocks. For example:

  • Since 1990: gold lags the S&P, +357% vs. 831%, both on a price basis
  • Since 2000: gold beats stocks by a wide margin, +560% vs. +124%
  • Since 2010: gold hasn’t been great vs. stocks, +65% vs. +195%
  • Over the last year: gold trounces stocks, +22% vs. +8%

A better way to think about this, especially with gold’s recent strong performance, is to look at trailing 1-year price returns for gold versus the S&P 500. The chart below shows that data on a monthly basis from 1990 – present. When the line is above the y-axis, gold has outperformed over the last year and when it is below gold has underperformed.

We see 3 points of interest in this data:

#1: If you looked at that chart and said to yourself “that’s a really wide range of outcomes”, you’re right because the correlation of monthly returns between gold and the S&P from 1990 to 2020 is -0.18, for an r-squared of just 3%. Yes, gold has on average underperformed the S&P 500 by 2.9 points on a rolling 12-month basis over this timeframe. But with its essentially zero correlation it has provided to be useful diversification and been generally additive to portfolio returns when stocks have faltered.

#2: In the 368 months since January 1990, gold has shown +20 points of annual outperformance to the S&P in just 65 months, or 18% of the time. These tend to cluster around crisis events and their aftermaths: 2003 (Gulf War II), 2006 – 2011 (Financial Crisis) and 2020 (COVID Crisis). In all the pre-2020 cases gold went on to underperform stocks, as evidenced by the line on the chart above routinely moving below the y axis after reaching +20 points.

#3: The fact that gold’s recent outperformance, which peaked on a monthly basis at 32 points in April 2020, has not yet reached the 40/50-point extremes of 2003 and 2006/2008/2011 is the key issue when deciding on a gold position just now. If equity prices are right and the next 12 months will see global economic recovery, then gold is probably done here. If that rosy outlook is wrong, then gold certainly has room to work relative to stocks. History is crystal clear on this point.

Takeaway: we don’t hedge our overall bullish investment stance very much, but gold is one asset class where we continue to make an exception. The economic damage wrought by COVID will necessitate more fiscal stimulus in the US and Europe. Stock markets know that politicians and central bankers have no choice in implementing those policies. That is a good backdrop for further gold price appreciation.

#2: Tesla may not be in the S&P 500, but it is in the NASDAQ 100 (tracked by the QQQ ETF) and the NASDAQ Composite (investors’ proxy for US Tech stocks). The weightings and a bit of background:

  • TSLA is 3.5% of the NASDAQ 100/QQQs.

    It is behind Apple (13.2%), Microsoft (10.9%), Amazon (10.8%), Google (6.8%) and Facebook (4.2%) …

    … But ahead of NVIDIA (2.8%), Adobe (2.1%) and PayPal (1.9%).
  • TSLA is 2.4% of the NASDAQ Composite. All the same names as the NASDAQ 100 appear on the league table here, both ahead of and behind its weighting.

So, we have a few companies that broadly line up with Tesla in its “bottom half of the top 10” weighting: Facebook (just above) and NVIDIA, Adobe, and PayPal (all somewhat below). Here is what each company showed in terms of revenues and profits over the last 12 months:

  • Tesla: $25.8 billion in sales, $368 million in after-tax profits
  • Facebook: $75.2 billion in sales, $23.5 billion in profits
  • NVIDIA: $13.1 billion in sales, $3.4 billion in profits
  • Adobe: $12.4 billion in sales, $3.9 billion in profits
  • PayPal: $19.2 billion in sales, $2.6 billion in profits
  • Average of these 3: $14.9 billion in sales, $3.3 billion in profits

The point here is that TSLA has a 50% greater weighting in the NASDAQ 100/QQQs and 59% higher weight in the NASDAQ Composite than the average of 3 well-run companies that earn 9x what Tesla makes.

Put another way, Tesla has 80% of the market cap of Facebook but makes only 2% of the profits.

Admittedly, calling out Tesla for being a highly valued stock is easy, but the real point of this analysis is the effect a dramatic selloff in the stock will have on the QQQs and the NASDAQ Composite. TSLA is already 2.5x more volatile as the average of FB, ADBE, PYPL and NVDA. If – just to pick an extreme outcome – the stock gets cut in half that would, on its own, hit the QQQs and NASDAQ Comp by over 1%.

Takeaway: we wish TSLA shareholders and the company all the success in the world, but its outsized weighting in the QQQs and the Comp combined with its unusually high valuation and volatility make the stock a systematic risk to investor confidence.