Will The Curse of St Vidia strike again?

For the past year, one specific day each quarter has dictated what happens in markets for the next three months. The next one falls on 28th August. Will it be right again?

I wrote this piece back in April, a few weeks before Nvidia’s May results. Sadly (from my perspective, anyway), it held true. Will it be right again next week?

“St Vidia’s day, if results do beat

Active managers knocked off their feet

St Vidia’s day, if thou doth fail,

Index funds shall turn so pale”

So goes the infamous St Vidia’s day rhyme. Dating back hundreds of days, it suggests the quarterly results announcement of Artificial Intelligence (AI) chipmaker NVIDIA will dictate whether most active managers will beat the market over the next 30 days, or if they’ll be condemned to another month of struggle and scorn.

The next St Vidia’s Day falls on 22nd May (NB now it’s 28th August). It will see active managers gather around their Bloomberg terminals, fingers crossed, to see what awaits. Time will tell.

The last St Vidia’s Day, which fell on 21st February, was a disaster for active managers. In the 30 days prior, when talk of the market ‘broadening out’ was rife, 64% of all IA-registered active equity funds had beaten the MSCI World Index.

Then NVIDIA announced its blockbuster results, and in the 30 days that followed just 14% of active managers outpaced the global index.

That the results of a single company should dictate the fortunes of the entire active fund management industry is odd. What’s going on?

Because NVIDIA is a relatively large position in the index, it stands to reason that active managers will, collectively, have lower exposure to it than that index. So NVIDIA’s share price rocketing is likely to boost the index more than it does the average active fund.

And before you passivists’ wade in with the old “active funds are the market, so they can’t hold less than the market in NVIDIA” schtick, note that you’re a) assuming active funds equal the market (which they don’t) and b) that ‘average’ here is weighted by fund size (which it isn’t).

But it is fair to point out that NVIDIA is ‘only’ 3% of the global index. This shouldn’t be enough by itself to tip the whole market so dramatically against active funds. So what’shappening?

My own pet theory is that NVIDIA has become the poster child for the years-long ‘mega-cap wins’ theme. NVIDIA beating expectations doesn’t just signify that its own share price will rally, it sends up a bat-signal that tells all sorts of momentum investors and market timers to pile into index funds and/or the top end of the market.

This then becomes a self-fulfilling prophecy, with mega-cap stocks across the globe rallying hard (regardless of whether they have any link to the AI theme that supposedly justifies the frenzy).

After a month this effect seems to peter out, flatten off, then go into reverse. Sure enough we’ve seen this ‘broadening out’ of late, with 61% of active funds ahead of the MSCI Worldover the last month. If form holds, this will reverse on May 22 if NVIDIA’s results surprise positively (NB — it did, see updated chart below). But if they disappoint? I’d expect active managers to win even more emphatically, as momentum investors and market timers flip the other way.

What am I basing this guess on?

History: Specifically that these conditions seem to rhyme with what we saw at the turn of 2000. I think it’s wise to consider the risk of that happening again today. Let’s look at some parallels.

Back in 2000, we were excited about the arrival and likely growth of the internet. We were particularly excited about those “picks and shovels” chip manufacturers that would power this growth. Cisco was the biggest.

Cisco has been an astonishing investment and a great company. If you’d bought at IPO in 1990 and held on, today you’d hold a massive profitable company, and would be sat on a return of 180,798%. This is just reward for being smart enough and — crucially — early enough to spot the future rise of the internet and back a likely winner.

If you’ve done that — bought early then held on tight for 34 years without looking — this is how it looks:

But, of course, it didn’t look like that — markets don’t work in straight lines. By the time it became obvious that the internet (and Cisco with it) was going to be huge, all future returns — and then some — had already been sucked forward by the end of 1999.

Anyone buying when it was obvious headline news didn’t get those returns. In fact, most made a loss: Cisco’s share pricedived by 88% over the next 18 months and is still $30 lower today.

I’m no stock analyst — far from it — but the parallels with NVIDIA today must at least give pause for thought. Its share price has recently gone exponential too, in the belief it will provide the picks and shovels for the coming AI revolution, just as Cisco has for the internet.

Back in 2000, Cisco was the second largest stock in the US index, behind only Microsoft. Microsoft too endured its own lost decade, falling by around 60% over the coming years then only breaking even 16 years after its 2000 peak.

But it wasn’t just a tech lust that drove markets to unsustainable highs. There was a widespread rush into all things mega-cap, as these were seen as the indestructible superiors to mid and small caps that won regardless of whether markets rose or fell.

But in 2000 this trend also reversed dramatically — the world’s 50 largest companies, as measured by the DJ Global Titans Index, collectively halved in value over the next three years, dragging the global tracker with them: Its holders failed to make any money at all between 2000 and 2007. Quite the drought.

Conversely, the active managers who’d avoided the overpriced mega-caps (and survived trying) entered a golden age. So while only 23% of them beat the titans in the five years before 2000, this rose to 84% in the seven years after the mega-cap frenzy peaked.

Are we on the verge of another such a reversal? My last column took the mickey out of financial forecasters, so I’ll stop short of that. But in terms of risks, this looks like a big one. And if all your eggs — and clients — are in a market cap-weighted index fund, it might be worth considering. Or you could just hope that, come all future St Vidia days, the weather stays fine.