I’ve just updated my Keeping Score page, for the first weak month we’ve had in a long time. Sector performance is not completely what I would have expected.
I’ve just updated my Keeping Score page for S&P 500 sector performance last month.
I’ve just updated my Keeping Score page to analyze the relatively benign stock price action last month, as well as to outline S&P 500 performance for 2017 as a whole.
Happy New Year!!!
I hadn’t realized how dependent I’ve become over the past ten years on the Google Finance page. Google Finance’s debut coincided closely with my retirement from my job as a global equity portfolio manager. I found that GF met enough of my personal money management needs that I didn’t miss my $26,000/year Bloomberg terminal much at all. (The ability to see a company income statement dissected in a way that revealed major customers and suppliers–and their relative importance–came to
Bloomberg later. Assuming it’s still there, that’s a really useful feature for a securities analyst.)
What I liked about the old GF:
–everything was on one page, so I could take in a lot of information at a single glance
–it contained information about stocks, bonds and currencies, so I could see the main variables affecting my investment performance grouped together
–there was a sector breakout of that day’s equity performance on Wall Street
–I could add new stocks to a portfolio list easily, and thereby be able to see what was going up/down for a large group of stocks I was interested in
–I could compare several stocks/indices on a single chart, and vary the contents of that chart–and its timeframe–easily.
The charts themselves were not so hot. But I could either live with that or use Yahoo Finance. (I have a love/hate relationship with charts, in any event. My issue is that stretching the price and/or time axes can change a bump in the road into a crisis and vice versa.)
The new Google Finance?
–All of the stuff on my “likes” list has disappeared.
–The Dow Jones Industrials–a wacky, irrelevant index whose main positive point is that it’s easy to calculate–features prominently in coverage of the US.
–The Sensex has been consistently listed as a top-five world index, even though India is an insiders market that’s extremely difficult for foreigners to access. Same for Germany, where there’s no equity culture and little of the economy is publicly listed. No mention of Hong Kong or Shanghai or Japan or (most days) the UK. Yes, the UK economy is smaller than Germany’s. But London’s significance comes from its being the listing hub for many European-based multinationals.
My conclusion: the new page has been put together by people who, whatever their tech smarts, have no clue at all about what an investor needs/wants. Its overall tone seems to be to provide information that an investor will like to hear, based on browsing history. Put a different way, the new page strives to turn users into the prototypical “dumb money.” Actually, now that I’ve come to this realization, maybe the new page isn’t so counterproductive after all. Just don’t use it.
…to us as individual investors, for the portion of our assets we choose to manage actively.
As of the close of trade in New York last Friday, the Standard and Poors 500 was weighted, by sector, as follows:
Consumer discretionary 12.1%
Real estate 2.9%
The goal of active managers is to have better results than the index (I could say “an index fund,” but the two are the same, less the small fees an index fund purveyor charges). We’ll only have different results if we have different holdings than the S&P. And if our holdings aren’t different–either different names or different weightings (or both)–we can’t be better. In order to be different our first job is to know what the index looks like. The list above is a first cut.
Let’s rearrange it to show the sectors in order from the most sensitive to general economic activity to the least. I’m going to divide the sectors into three groups, from those that do best in a red-hot world economy, those that will still do well with so-so growth, and those that have the most defensive characteristics–meaning they do their best relative to the index when economies are contracting.
most economically sensitive
————————————-total = 18.9%
Consumer discretionary 12.1%
Real estate 2.9%
————————————-total = 53.1%
————————————-total = 27.3%.
I’ve stuck Energy in the most sensitive segment. Recently it’s been marching to its own drummer, as the big integrated oils restructure and as the crude oil price yo-yos up and down. Ultimately, though, I think in today’s world oil is just another industrial commodity that’s not that different from steel or aluminum. Put it somewhere else if you disagree.
This isn’t the only reordering we could make. We could also arrange the index by market capitalization in order to either emphasize big stocks or small ones in our holdings. But this is the most common one professionals, and their institutional customers, use. Personally, I think it’s also the most useful way to think about the index.
To my mind, the most striking thing about the S&P 500 is that it is mostly geared to a rising economy. If we think recession is brewing, tiny changes in holdings aren’t going to make much of a difference in relative performance.
Another–very important–point is that if you have a portfolio that’s, say, 10% Healthcare, and your benchmark is the S&P 500, you’re betting against Healthcare as a sector, not on it.
Another good month for the S&P 500, but one in which IT trailed all the other sectors. Countertrend rally in the offing? I’ve just updated my Keeping Score page with last month’s sector performance.
The Wall Street Journal has an interesting article today on the birth of the ETF–and the index fund, for that matter.
Two factors stand out to me as being missing from the account, however:
–when the S&P 500 peaked in August 1987, it was trading at 20x earnings. This compared very unfavorably with the then 10% yield on the long Treasury bond. A 10% Treasury yield would imply a PE multiple on the S&P of 10x–meaning either that bonds were dirt cheap or that the stock market was wildly overvalued vs. the bond market.
–a new product, called at the time portfolio insurance, a form of dynamic hedging, had very recently been created and sold to institutional investors by entrepreneurs steeped in academic efficient markets theory. Roughly speaking, the “insurance” consisted in the intention to stabilize equity portfolio values by overlaying a program of buying and selling futures against the physical stock. Buy futures as/if the market rises; sell futures as/if the market falls.
One of the key assumptions of the insurers was that willing/eager counterparties for their futures transactions could be found at all times and at theoretically predictable prices. On the Friday before Black Monday–itself a down day–the insurers’ model required them to sell a large number of futures contracts. Few buyers were available, though. Those who were willing to transact were bidding far below the theoretical contract value. Whoops.
On Monday morning, the insurers, who appear to have had negligible actual market experience, capitulated and began selling futures contracts at whatever price they could get. This put downward pressure both on futures and on the physical market. At the same time, pension funds, noting the large gap between the price of futures and the (much higher) price of the underlying stocks, began to buy futures. But to counterbalance the added risk to their portfolios, they sold correspondingly large amounts of stocks. A mess.
Arguably, we would shrug off at least part of this today as just being crazy hedge funds or algorithmic traders. Back in 1987, however, equity portfolio managers had never before seen derivatives exerting such a powerful influence on the physical market. It was VERY scary.
conclusions for today
Stocks and bonds are nowhere near as out of whack with one another as they were back in 1987. The nearest we have today to a comparable issue is what happens as worldwide excess liquidity is drained by central banks from money markets.
The trigger for the Black Monday collapse came from an area that was little understood, even by those involved in it–activity that had severe negative unexpected consequences. The investors who did the best after the crash, I think, were those who understood the most quickly what had happened.
Collateral damage: one of the most important results of Black Monday, I think, was the loss of confidence in traditional investment advisers working for the big brokerage houses that it created. This was, I think, partly because of individuals’ market losses, but partly, too, to the generally horrible executions received when they sold stocks in the aftermath. This was the start of a significant acceleration of the shift to discount brokers and to mutual fund products.