my worry

This is the question I was writing about a few days ago.

The outstanding characteristic of the US stock market vs. other national markets during my career has been that Wall Street has been, almost uniquely, dominated by stock pickers.  While political or macroeconomic concerns occasionally arise, the focus of the vast majority of stock market participants has been on the merits (or lack of them) of individual stocks.

Many veteran stock pickers on the sell side have either retired or been laid off over the past several years, however, and institutional pension money allocated to active investing has increasingly been funneled to trading-oriented hedge funds or other “alternative” investment vehicles in a so-far vain attempt to close the gap between the assets they have on hand and the minimum they need to meet their present and future obligations.

The result of this change has been an increasing influence on stock prices by computers that react to news of all sorts as it is published and by short-term human traders sensitive to macroeconomic trends but with (to me) surprisingly little knowledge of the ins and outs of individual companies or industries.

My worry has been that–as has happened in other countries–the macro woes of sectors like Energy and Materials, or perhaps the demise of the post-WWII industrial corporate structure, overwhelm the attractions of even large micro pockets of strength in, say, IT.

last Friday

My worries have no basis in fact, at least so far, if last Friday’s trade is any indication.

The S&P 500 was up by 1.1%, the IT-heavy NASDAQ by 2.3%.  However, consider the performance of the following companies that reported earnings before the open:

Microsoft         +10.0%

Alphabet (aka Google)          +7.7%

Amazon          +6.2%

athenahealth   (a weak performer before Friday)      +27.5%.

 

Compare that with:

VF          -12.9%

Skechers          -31.6&

Pandora Media          -35.6%%.

 

Two things stand out to me:

–most of these reactions are extreme, suggesting that the market is reacting to the news rather than anticipating it, and

–the market is very willing to differentiate sharply between individual winners and losers.

 

My conclusion:  we as individuals can still ply our stock-selecting trade.   The reward for finding superior companies, however, may come all at once, and later than we have been used to in the past.