Bad news for blue chip investors
As you may know, I am still very bullish on the indexes. But bullishness has some reservations.
The thing I find worrying is the same thing that makes Fool writers optimistic: record levels of cash held by S&P 500 blue chips.
There is one party line that I disagree with: that they hoard cash in anticipation of a double-dip recession. It's not very convincing. If we double-dip, the second dip will not be anything like the first one. Any double-dip recession will be highly inflationary and it will be foolish to hold too much cash.
The other party line which I also disagree with is that they mean to return more cash to shareholders through dividends and buybacks. Unlikely. We haven't punished CEOs for shareholder-unfriendliness barely enough to make them shareholder-friendly. For that we would need to drive S&P 500 index down to 400 or less, and maybe then they would start noticing us. They will increase dividends of course, but only to the 2007 levels.
My own hypothesis is that they mean to use the cash for corporate acquisitions. And corporate acquisition means overpayment. In other words, we may see some transfer of wealth from the largest companies in the index to the midcap and smallcap companies. And considering the easy availability of credit at insanely cheap rates, we may have reason to worry.
If I am right, then midcap indexes may outperform blue chips in spite of blue chips' superior fundamentals.