It is clearly going to take a lot of market mayhem to dislodge Globe and Mail readers from their leadership perch in our inaugural Investing Club Challenge. This week’s inflation-fueled tumult caused barely a scratch.
On Tuesday, the U.S. consumer price index showed that U.S. inflation remained sticky in January, rising 3.1 per cent from a year ago, or slightly higher than the 2.9 per cent increase that economists had been expecting.
The reading pushed back the best guesses for the start of interest rate cuts to June, dashing earlier hopes that the Federal Reserve could initiate a cut in May. The earlier the cut, the thinking goes, the better the chances that the U.S. economy will continue to expand and deliver stronger corporate earnings.
Cue the tantrum: The Dow Jones Industrial Average fell as much as 750 points in afternoon trading on Tuesday. The broader Standard & Poor’s 500 index fell 1.4 per cent, marking one of its most severe one-day flops of the past year.
The timing of the selloff on Feb. 13 couldn’t have been more dramatic. The 13th of each month is the day we update the cumulative results of this challenge, which pits Globe readers against the stock market’s top benchmarks and our own team of in-house equity pontificators.
The Investing Club Challenge began last March, when we asked Globe readers to submit three stock picks. These stocks are held for one year, without trades or excuses. From the hundreds of submissions, we’ve chosen the 12 most popular stock picks and created the Readers’ Portfolio.
Despite Tuesday’s jitters, the portfolio is up 32.4 per cent, including dividends. That’s beating the 30.2 per cent total return of the S&P 500 over the same period.
It’s also killing the 8.3 per cent return of the S&P/TSX Composite Index. And, yes, it’s humiliating our own Globe Hot List of stocks, which are underwater.
The Readers’ Portfolio has delivered market-beating gains from the get-go, thanks partly to a not-so-secret weapon: Nvidia Corp., a tech stock that is directly associated with the commercial promise of artificial intelligence.
Since the start of the challenge, Nvidia has delivered outsized gains of 209 per cent. Over the past month alone, the stock has gained nearly 32 per cent.
However, this outstanding performance has raised some concerns among market watchers that the AI-trade could be overdone, with sky-high valuations reflecting unrealistic expectations from investors. Nvidia, for example, trades at more than 92-times earnings, which is well above the average price-to-earnings ratio of 22.4 for the S&P 500.
In the near term, this might not be a problem. John Higgins, chief markets economist at Capital Economics, expects that the S&P 500 will rise to 5,500 by the end of this year and then rally another 18 per cent by the end of 2025 as investors continue to ignore valuations.
“Our end-2025 forecast of 6,500 for the index is premised on its valuation reaching a similar level to its peak during the dot-com mania,” Mr. Higgins said in a note this week, referring to the tech-stock euphoria of the late 1990s.
Still, betting on a bubble could offer investors a few bumps. The Readers’ Portfolio appears especially vulnerable to volatility given that it is exposed to other tech superstars that have been soaring over the past year and are now facing increased scrutiny about their growth prospects.
One casualty: Shopify Inc., a performer in the Readers’ Portfolio since the start of the challenge, fell 12.5 per cent on Tuesday after reporting its quarterly financial results before the start of trading.
That took a bite out of the portfolio’s performance. With a month left in the challenge, though, Globe readers are still on top.
David Berman