April 21, 2017
From Hendrick Bessembinder’s recent white paper.
While the overall stock market outperforms Treasury bills, most individual common stocks do not. Of the nearly 26,000 common stocks that have appeared on CRSP since 1926, less than half generated a positive holding period return, and only 42% have a holding period return higher than the one-month Treasury bill over the same time interval. The positive performance of the overall market is attributable to large returns generated by relatively few stocks. When stated in terms of lifetime dollar wealth creation, one third of one percent of common stocks account for half of the overall stock market gains, and less than four percent of 28 common stocks account for all of the stock market gains. The other ninety six percent of stocks collectively matched Treasury-Bill returns over their lifetimes.
April 21, 2017
The stock market continued its climb upward during the first three months of the year. The S&P 500 Total Return index finished with a gain of 6%, and the bull market celebrated its 8th birthday! The Dow Jones Industrial Average (DJIA) closed at a record high for 12 days in a row during February. This was a milestone that has been seen very infrequently in the history of the DJIA. We are constantly hearing opinions and reasons why the bull market’s end is near, but the market has been able to shrug these off for years.
The biggest event during the first quarter was the transition of power from Obama to Trump. Investors are hopeful that tax reform might be on the way. There was also initial hope that the repeal and replace of Obamacare would be a huge plus for US stocks. However, the failure to do anything meaningful with healthcare was a stark reminder to everyone that politicians love to say things and then get nothing done. This is just the world we live in now, and we don’t see that changing any time soon. The one thing we do know about politics is it is very dangerous to mix your political views with your investment strategy! We had conversations with many people who were convinced the world was ending because of one of Obama’s policies or another. We are hearing the same thing about Trump now (although from different people). The market did extremely well under Obama and his policies. Only time will tell if it will for Trump or not. Keeping your politics out of investing will help you see things much more objectively.
There has also been a lot of talk during the beginning of the year about low volatility levels. We certainly don’t disagree with that from a broad market point of view. However, we have noticed more volatility under the surface of the broad market and in high momentum strategies in particular. There were several days during the quarter that the highest momentum stocks dramatically underperformed the broad market. We tend to see that happen from time to time, but seemed out of character this quarter considering momentum held up very well relative to the broad market. We think this speaks to the underlying sentiment of investors who still seem very skittish even after an eight year bull market run. This is actually a good thing from a longer term perspective. Once investors turn euphoric it has historically been the precursor to a major top. That doesn’t seem to be the case right now at all. Investors are still waiting for the proverbial next shoe to drop. Climbing the wall of worry has always been necessary in bull markets, and it appears that wall doesn’t show signs of crumbling soon.
The one big area that didn’t do well to start the year were oil and energy prices. Just one year ago it was a totally different story. A year ago, we saw a huge laggard bounce from the energy sector that had been beaten down in 2015. That laggard rally was difficult for momentum strategies because oil had performed so poorly the twelve months prior. The S&P Goldman Sachs Commodity Index (GSCI), which is dominated by energy prices, was down more than 5% for the quarter. This caused shifts in a lot of our models and we reduced exposure to energy in a lot of our portfolios.
Despite the commodity weakness, Emerging markets did particularly well to start the year. Developed markets also outperformed US markets. Our domestic markets have been performing much better than international markets over the past few years. We might be in the initial stages of that changing. The price earnings ratios of emerging and developed markets indexes are well below those of the S&P 500. We are also seeing international equities demonstrating good relative performance and moving up our asset allocation rankings. That combination of good momentum with relatively attractive valuations is something to keep an eye on for the remainder of the year.
We are off to a good start to the year. FactSet is predicting first quarter earnings to grow at a decent pace, and there are a number of other positive factors that support higher prices in the coming months. If you have any questions about any of our strategies please don’t hesitate to contact us at any time.
This information is from sources believed to be reliable, but no guarantee is made to its accuracy. This should not be considered a solicitation to buy or sell any security. Unless otherwise stated, performance numbers are not inclusive of dividends or fees. Investors cannot invest directly in an Index. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.