Yesterday we highlighted the stealth correction that has taken place and also noted that from a technical perspective Knowledge Leaders – the world’s most innovative companies – have been more insulated than the rest. To further illustrate that last point we show below the most blunt charts we have depicting momentum of particular groups of companies. The two charts are:
- The percent of issues with their 50-day moving average above their 200-day moving average and
- The percent of issues that are trading above their own 200-day moving average
In both cases, our basket of developed market Knowledge Leaders is behaving significantly more strongly than the MSCI World Index. 69% of Knowledge Leaders have a 50-day moving average higher than their 200-day moving average compared to just 58% of MSCI World constituents. 57% of Knowledge Leaders are trading above their own 200-day moving average compared to just 49% of MSCI World Constituents.
Readers may be wondering why it is that when markets get squirrely, like now, the Knowledge Leaders tend to perform better. The simplest explanation we can provide is that highly innovative companies – Knowledge Leaders – produce their own unique capital stock (rather than buying it on the open market from a 3rd party) that cannot be easily replicated. This unique capital stock both insulates a company from outside competition (think Warren Buffet’s “moat”) and also creates a winner take all dynamic in the area where the company competes (think Facebook or Google). The result is higher profit margins, less debt, and more stable returns, which are all things that become more attractive to investors as markets flare up.