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"Nothing Is Working" - The Markets Just Aren't That Into You
Via ConvergEx's Nicholas Colas,
Netflix may be the only S&P 500 name that has doubled in 2015, but it’s not really the most important stock in the index. First, there is Amazon, up 72% on the year. The online retailer is the single reason the large cap Consumer Discretionary sector is up on the year, for without AMZN’s 9% weighting that group would be down over 3% instead of 3.4% higher. Then there is UnitedHealth, 20% higher on the year, which is enough to make Health Care “Green on the screen” for 2015. Without it, that sector would also be negative in 2015. Why all the fuss? Because these are the only industry groups in the S&P 500 that are up for the year, but it’s all because of those 2 stocks.
Pull back the curtain on the entire set of global capital markets, and the story is similarly dreary. Domestic bonds? Down 1-5%. Precious metals? Down 3-4%. Developed economy equities? Down 6%. Emerging economies? Down 17%. Fourth quarter 2015, which starts in 4 trading days, will be a lively period as investors work out which of these asset classes will go positive and which will sink further. In short, for many active investors the year comes down to the next 3 months.
With less than 100 calendars days – and only 69 trading days – left in 2015 it’s not too early to consider what kind of year we’ve had in capital markets. Simply put, it stinks. That assessment isn’t just because of the -6.1% return for the S&P 500 year to date. Rather, it is because essentially nothing has been working. Consider:
U.S. stocks, regardless of market cap range, are down on the year. The S&P 400 Mid Caps are down 4.3%, and the 600 Small Cap Index is down the same amount. The Russell 2000 is 5.3% lower.
Developed economy equities – we’ll use the MSCI EAFE (Europe, Asia, Far East) index here – are down 6.4% in dollar terms for 2015 YTD. Emerging market equities, as measured by the MSCI Emerging Markets Index, are 17.4% lower in dollar terms. Even the popular ‘Long Europe, short the euro’ trade is down by 3.4% in 2015.
Fixed income assets, typically a hedge against lower equity prices, are lower on the year. Long dated Treasuries, as measured by the Barclays 20+ Year T Bond Index, are down by 2.6% year-to-date. Domestic high grade corporate bonds are 2.8% down in 2015, and high yield corporates are 5.7% lower. International bond indices like the Barclays Global Treasury ex-US index are 5.6% down on the year.
Precious metals are down 2.7% for gold and 4.2% for silver.
If you want to find appreciating assets, you have to go pretty far afield, or exhibit some unique insight and bravery. For example, old Ferraris, according to the Historic Automobile Group International (HAGI), are up 8% year to date. Closer to home for equity markets, there are 9 U.S. listed exchange traded funds that are up more than 30% on the year, but all of them are highly volatile and most use daily resetting leverage to achieve those returns. More generally, only 400 of the 1,773 ETFs listed in the U.S. currently show a positive return.
If you focus on U.S. equities, you might rightly point out that two industry sectors of the S&P 500 are up on the year: Health Care (+0.6%) and Consumer Discretionary (+3.5%). And that much is true, but lest you think this is a sign of widespread enthusiasm for these groups, consider that in each case it is only one stock that puts these industries in the green for 2015. The math here:
Amazon is up 72% year to date and has a 9% weighting in the large cap S&P Consumer Discretionary Sector Index. That means it has added 6.5 percentage points to the group, almost double its actual performance. Put another way, without Amazon the Consumer Discretionary sectors would be down 3% in 2015, right in line with the performance of the other consumer group – Staples – which is 3.0% lower for the year.
In the case of that squeaker positive return for Health Care, it is UnitedHealth that pushes it into the black for 2015. UNH is up 19.8% on the year and has a 4.5% weighting in the S&P large cap Health Care index. That means it has boosted the overall return for the group by 0.9% - again, enough to lift the return to a positive number for the year.
In short, Amazon and UNH are all that separate the 10 industry sectors in the S&P 500 from showing a negative return not just for the S&P 500, but for every major industry classification.
If all this makes you think that “Big Winners” have been thin on the ground in 2015, you are correct. Looking at the top performing stocks thus far within the S&P 500, we find the following:
Only one stock has managed to double in 2015: Netflix (up 113% as of the close today).
Only five stocks are up +50%. There is NFLX, of course, Amazon (+72%), Cablevision (+64%), Activision (+ 58%) and Under Armour (+51%).
Only 10 stocks are up +40%. They are the names above, plus Electronic Arts (+46%), Martin Marietta Materials (+45%), Starbucks (+42%), Expedia (+42%) and Vulcan Materials (+41%).
Only 29 stocks are up 25% or more. We won’t list this last batch, but you get the idea. Less than 6% of the S&P 500 is up 25% or more. Conversely, 74 names (15% of the index) in the S&P 500 are down 25% or more.
Now, the year isn’t over, and that’s the most important point of this exercise. With just 3 months left on the calendar, many investors are down on the year for the reason we’ve outlined here: nothing is really working. That leaves them only a short period to show a positive return, or at least a less-negative result than whatever index they track. To do that, many will have to make very specific and concentrated bets. It might be about equities generally – will they recover from the current growth scare? Or it might be asset allocation – will bonds finally go up on the year? For stock pickers, the key question is certainly “Play the winners, or look for laggards?”
All we know is that with 69 days left to play catchup, time favors the fleet. And the bold.
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My TWTR short is working...
Wait, didn't Yellen and the QE4Eva guarantee destroy the USD? But, but, but . . . . . I'm confused I need to consult Cramer.
Don't look know USD just may be approaching breakout from the consolidation triangle and bullish descending wedge . . . . . . . . . never mind that's impossible.
Pfff i'm WAY up... my best year so far. Buy and hold is over (for now), Tyler
https://en.wikipedia.org/wiki/Swing_trading
Forget buy and hold with daily 10% flash crashes. And who cares about holding for a dividend when the stock can trade in a range of the entire dividend within one day.
If you manage your portfolio there is just as much money to be had in bad times as good times,commodities,currencies,dividend shares,options.You have to actually work to make money.
capitalism works...cronyism doesn't. The Rule of Law works...Corruption doesn't
october is coming. the bold will be scorched.
In short, for many active investors the year comes down to the next 3 months.
An interesting sentence to analyze using semiotics.
Stuttering a lot lately.
What happens when everyone shorts the market?
The trend is your friend until you reach the end.
Please, nothing is "working" because there are no "markets", period.
You just need a simple concept to make tons of money, that's all. Everything starts with the TV: playing games, Elecgtronic Arts, watching movies, Netflix, or whatever Activision, Cablevision, right? And the news, of course... But then, you need also some coffee from Starbucks, and Amazon Prime service to get regularly your fresh underwear, being it armored or not. It doesn't matter. It has to be soft! And, of course, you need some medical attention, too, for example - preventive mental disorder and other health counseling and quality treatments. Remember, consumption and the waste recycling represent 70% of our GDP. Do the right thing!
Lies don't work if you don't believe them.
New host of characters soon pushing old bullshit.
According to Itau BBA:
http://is.gd/XzTkOs
The Big Fear
Thus, Fed announcement day arrived with most equity markets up 5%-10% off the late August lows, commodity prices higher and rates priced for Fed action. The main concern coming into the Fed meeting was not that the Fed would hike; it seemed quite clear that it would not go against virtually the entire global economic policymaking community and raise rates. No, the concern was that the Fed would stand pat and stocks, rather than rally, would sell off.
Lo and behold, that is exactly what happened, and that is why we need to be very, very concerned about how things move from here. It remains unclear whether the equity market reaction to the Fed decision was (hopefully) just a classic case of buy the rumor (no hike) and sell the news, or something much worse, namely that investors might be starting to price in policymakers? loss of control – The Big Fear.
The Big Fear of policymakers losing control has been lurking underneath the global equity market for years, underpinned as markets have been by central bank support. Think of it this way: there are two global growth drivers: China and the US. Recently, the competence of the policymaking community in both countries has been called into question, suggesting a possible loss of faith in policymakers, which if true is very worrisome, thus the Big Fear concept.
Why is the Big Fear so worrisome? It’s simple. If investors lose faith in policymakers and decide that cash or bonds are a better place for their money, then stocks are likely to sell off much further. How much further? One never knows, but maybe asking a few questions might help. First, at what level does the S&P need to be for the Fed to engage in QE 4? Second, what S&P level will be considered cheap (keep in mind 2016 E estimates need to come in sharply)? I don’t know the answer to either question, but it seems reasonable to expect that the S&P would need to go much lower than the 1870 level it bottomed at in late August or the 1830 level of a year ago.
The economic implications of such a sell-off would likely be a US and global recession. Such an environment could create a negative feedback loop between financial markets and the real economy, which policymakers would find very difficult to break.
It seems clear that the Fed will not raise rates this year, neither next month when they meet again nor in December, which is the last meeting of the year. Will they raise rates in 2016? From this armchair, the odds are against it, as the forces of recession gather while the forces of reflation stagnate. On this front, one has to question the Fed's 2016 inflation forecast of 1.6%, up from 0.4% this year. The Fed’s crystal ball has been mighty cloudy for years, but this forecast takes the cake.
A look at the global economy helps explain why. Four factors stick out: excess debt, an absence of inflation, insufficient demand and excess supply of raw materials and manufactured goods. None of this is new – what is new is how the various hopes and remedies have fallen short while the problems deepen. The toxic combo of excess debt and disinflation is one powerful reason why the Fed did not move, and excess supply in commodities and manufactured items (look at the PPIs around the world) is another. The global economy needs demand-creation or production shut-ins, and to date both have been lacking.
There are small signs that the commodity complex is starting to finally adjust, with closures, dividend cuts and stock issuance in the mining sector and talks about talks in the world oil market. However, the manufacturing segment of the world economy is quite far behind the commodity segment, suggesting that China's need to shift excess production will ensure manufactured-goods disinflation for the foreseeable future.
One can wish for inflation and for the Fed to be able to hike, but one also needs to be focused on the realities of the current global economy. Where is the demand going to come from? Who is going to shut in production? Let?s look at the three main economic regions: Asia, Europe and the Americas. Asia is likely to be a source of manufactured-goods disinflation as it seeks to rebalance itself to a China that is a competitor first, a customer second. Japan's recovery is sputtering; it will continue QE while a fiscal stimulus package seems quite likely in the months ahead. Europe remains quite weak, and with the refugee issue now occupying policymakers, ECB-led QE seems the only game in town.
The Americas is a concern. South America is in a deep funk, whether it is Mexico's subpar growth rate, Brazil's political and economic travails, Andean copper dependency or the impact of weak oil on countries such as Colombia or Venezuela. All this is pretty well known.
The US is most worrisome because of its combination of still-high equity prices and a very bare policy toolbox to confront any economic weakness. How bare? Well, monetary policy is on hold, and the bar to QE4 is likely a much lower S&P. What about US fiscal policy, one might ask? Great question. Here is the only thing one needs to know about the US presidential election process: it takes fiscal policy flexibility away and locks it in the freezer until late 2017, two whole years from now. In other words, at a time when the US economic expansion is close to seven years old, with the Fed on hold, incomes flat, debt levels high, a strong dollar and absolutely no inflation, fiscal policy is locked away for the next two years at least!
By the way, the UK confronts similar issues and could possibly be a canary in the coalmine for US monetary policy – QE for the people on BOTH sides of the Atlantic perhaps? The UK's negative rate discussion is likely to move across the pond over the next quarter or so. One other way of thinking about it is this: which comes first, the end of ECB QE or QE4 in America? I would go with the latter.
How does one vanquish the Big Fear? With aggressive policy action on the demand-and-supply side. What is the likelihood of that? Exactly. Seen in this light, it makes perfect sense for investors to worry that policymakers no longer have their back, and thus they take some money off the table. One analogy is that the US economy is like a ship that has engine trouble, is drifting towards the rocks and is left to hope that the wind shifts and takes it away from the reef…. not exactly a bull-market, high-valuation tableau. Hope is not a strategy.