Dance of Investing Styles Doesn’t Signal a Downturn

The U.S. stock market notched yet another record on Wednesday, and many investors are anxiously looking for signs of a slowdown.

Perhaps not coincidentally, researchers at Sanford C. Bernstein & Co. say they’ve spotted one. According to Bloomberg News, Bernstein has found that correlations among investment styles — or factors — such as value and momentum “have shot to all-time highs.”

That means they are moving in the same direction, and that is apparently a bad omen. As Joseph Mezrich, managing director at Nomura Securities International Inc., told Bloomberg, “In the past factor correlation has tended to rise in periods of macro stress.”

The concern is likely to interest more than just wary investors. Factor investing is increasingly popular. Investors have poured $352 billion into value, momentum, quality and other factor exchange-traded funds since 2013, according to Bloomberg Intelligence, nearly double the $191 billion in factor ETFs at the end of 2012.

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What Does the Longest Bull Market Mean? A Debate

There’s lots of disagreement about whether the current bull market in stocks is now the longest in history. Bloomberg Opinion columnists Nir Kaissar and Barry Ritholtz recently met online to debate its longevity, whether it matters and if anyone should care. They previously discussed passive versus active investing and global equity valuations

Nir Kaissar: The U.S. bull market became the longest on record yesterday. It’s been 3,453 days since the market hit bottom in March 2009, surpassing the run that began in October 1990 and ended when the dot-com bubble burst in March 2000.

Or did it? According to Yardeni Research Inc., the bull market that ended with the dot-com bust began in December 1987 — not October 1990 — and lasted 4,494 days. By that count, the current bull market won’t steal the record for another three years. And that assumes this bull run began in March 2009, a claim that Barry will undoubtedly contest.

It’s tempting to wave this away as frivolous banter among market historians. But that’s a mistake because this debate is about the future, not the past. By asking whether this bull market is the longest in history, investors are really asking whether it’s near an end.

It’s an unavoidable question. Underlying most portfolios are so-called capital market assumptions — estimates of how various investments will perform in the future. Those assumptions have a big impact on how the portfolio is constructed.

Which inevitably raises more questions: Does the length of a bull market say anything useful about the future? And are there more reliable ways to forecast what’s ahead?

Barry Ritholtz: I am fascinated by this topic! Over the years I have spent a lot of time thinking and writing about it (see this).

I have found the conventional wisdom on determining the age of bull markets to be mostly wrong. No, bull markets do not begin from bear market lows. If this bull began in March 2009, then did the postwar rally from 1946 to 1966 actually begin in 1932? Did the 1982-2000 bull market start at the bear-market lows in 1974? Of course not — but that’s where the claim this bull market began in March 2009 leads to.

When did this bull market actually start? There are many ways to measure a bull market, but the most reasonable way is from when it makes new all-time highs. In this case, that means the start of this bull market was March 2013. The recovery from the financial-crisis lows, retracing the plunge from October 2007 to March 2009 is not, in my opinion, part of the bull market.

So no, bull markets don’t start at bear-market lows.

There are other ways we can debate the issue of whether or not this is the longest bull market ever, but perhaps we should discuss an even more important question: Does it really matter?

Bull markets do not simply die of old age; they don’t reach a certain length, and then keel over. What kills them are things that hurt corporate revenue and profits: high credit costs that makes borrowing costly, or inflation that makes input costs like natural resources, energy and labor more expensive. Or just a good old-fashioned recession — and even those don’t always kill the bull.

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These ETFs Save Investors a Trip to the Casino

Exchange-traded funds are looking for a few good gamblers.

ETFs are famous for tracking simple, broadly diversified indexes cheaply, transparently and tax-efficiently, an ideal combination for long-term investors. The problem for aspiring issuers is that the market for those ETFs is dominated by the big three — BlackRock Inc., Vanguard Group and State Street Corp. — which collectively manage 82 percent of ETF assets, according to Bloomberg Intelligence. To stand out, smaller firms are turning to more complex and niche funds.

Enter Innovator Capital Management, which is expected to introduce its S&P 500 Buffer ETF on Wednesday, the third in a trilogy. The S&P 500 Power Buffer ETF and the S&P 500 Ultra Buffer ETF launched last week. The funds shield “investors” from a one-year decline of up to 9 percent, 15 percent and 30 percent, respectively, in the S&P 500 Price Return Index in exchange for a cap on the index’s return.

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Elon Musk Isn’t Wrong About the Public Markets

If Elon Musk takes his electric car company and goes home, investors will be poorer for it.

Tesla Inc.’s colorful co-founder and CEO tweeted on Tuesday that he’s considering taking it private after complaining for years about life atop a public company. As Bloomberg News recalled on Tuesday, Musk expressed “his frustrations with having taken Tesla public” in an interview in January 2015 and has carped about the market several times since then.

Hours after the tweet, Musk laid out his beef with public markets in an email to Tesla employees. The gist is that 1) the volatility of Tesla’s stock is a distraction; 2) the scrutiny around quarterly earnings creates pressure to focus on short-term results at the expense of longer-term ones; and 3) short-sellers, or those who bet against the company, have an incentive to attack it.

My colleague Matt Levine rightly points out that Musk, “who is constantly tweeting attacks on journalists and jokes about bankruptcy, who is also busy running two other companies,” isn’t the best-suited critic of the market’s shortcomings. But don’t confuse the message with the messenger. Regardless of your opinion of Musk or the wisdom of taking Tesla private, with the number of companies listed on U.S. stock exchanges down to roughly 3,600 at the end of 2017 from more than 7,600 in 1997, it’s a good time to ask whether public markets are working the way they should.

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FAANGs Are More Solo Acts Than a Tech Supergroup

It’s time for FAANG stocks to break up, at least in investors’ minds.

Facebook, Apple, Amazon, Netflix and Google parent Alphabet can’t get away from one another. Every time one grabs the spotlight —  as Apple did last week when it became the first  U.S. company with a $1 trillion market value — it brings along the other four.

They’re alternately hailed as the hot stocks, technology’s brightest lights and indispensable growth companies, and jeered as a worrisome sign of a frothy and top-heavy market. But look closely and it’s no longer clear why they should be lumped together at all.

Let’s start with the technology moniker. Amazon is a retailer and Netflix is an entertainment company, which is why, contrary to popular perception, the Global Industry Classification Standard, or GICS, tags them as consumer discretionary companies, not tech. And as of the next GICS reclassification in September, Facebook will move from the tech sector to telecommunications, where it belongs. Only two of the five FAANGs, in other words, are true technology companies.

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Fidelity’s No-Fee Funds Unleash the Power of Free

Fidelity Investments fired a shot heard around the investing world on Wednesday: It announced it would roll out two index mutual funds on Friday that charge no fees.

Both funds will track market cap-weighted Fidelity indexes. The Fidelity ZERO Total Market Index Fund will invest in the largest 3,000 U.S. companies based on float-adjusted market cap, and the Fidelity ZERO International Index Fund will hold the top 90 percent of stocks within various developed international and emerging countries.

It’s tempting to dismiss the move as a marketing stunt. Fidelity doesn’t need the money. I counted more than 1,000 Fidelity mutual funds, including the various share classes, with close to $1.9 trillion in assets and an asset-weighted average expense ratio of 0.46 percent a year. That translates into roughly $9 billion of annual revenue.

And that’s just the beginning, because Fidelity does more than manage mutual funds. As Russel Kinnel, director of manager research at Morningstar, told Bloomberg News, “Fidelity has lots of ways to make money from customers once they are in the door.”

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How Index Funds Can Combat This Hidden Cost

Friday was a big day in the world of indexes. It was also a costly one for index investors.

I’m referring to the annual reconstitution of the FTSE Russell indexes — the day that the index provider officially updates the components and allocations of its indexes, such as the popular Russell 1000 Index and Russell 2000 Index.

It’s also the day mutual funds and exchange-traded funds that track a FTSE Russell index revamp their portfolios to match it. The result is a torrent of trading. Roughly 1.9 billion shares of common stock traded on the New York Stock Exchange on Friday, according to volume calculated by Bloomberg. It was the second-busiest trading day of the year and nearly triple this year’s average daily volume of 712 million shares.

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China Takes an Edge in Stocks to a Trade War

The saber-rattling for a U.S.-China trade war is becoming louder, and many observers are speculating about which country will blink first. One important variable will be the resilience of each country’s stock market, given the potential for mayhem from a melting market. So it’s worth asking which one is more likely to stand its ground.

There are several considerations, most prominently quality, free float and valuation. Let’s see how they stack up for each country.

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Trade War Would Cause Trouble on Home Front for U.S. Investors

President Donald Trump’s looming trade war is no friend of the U.S. stock market, and that’s bad news for U.S. investors who like to keep their money at home.

Free trade is under siege. The White House imposed $50 billion in tariffs on Chinese imports on Friday. China responded in kind. President Trump is now threatening up to $400 billion in additional tariffs, and China is vowing to retaliate again. Its Ministry of Commerce called for “comprehensive quantitative and qualitative measures” if the U.S. imposes additional tariffs.

The intensifying trade dispute should worry investors who are reluctant to venture overseas, and there are many of them. According to one estimate, U.S. investors, on average, allocate just 15 percent of their stocks to foreign markets. That’s a huge home bias given that the U.S. accounts for roughly half of global stocks by market value and a quarter of the world’s economic output.

Proponents of home bias argue that U.S. stocks provide plenty of exposure to foreign markets because large U.S. companies sell their wares all over the world. The percentage of S&P 500 sales from foreign countries was 43.2 percent in 2016, according to S&P’s most recent global sales report. That percentage has been reliably between 43 percent and 48 percent since 2006.

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Stock Buyers Lose Bond Foundation for Steep Valuations

Apologists for high U.S. stock prices just lost their favorite defense.

Ten-year Treasury yields rose above 3 percent on Tuesday for the first time since 2014, and bond investors are hysterical. Chris Verrone, head of technical analysis at Strategas Research Partners, told Bloomberg Television on Monday that breaching 3 percent would ring in “a 35-year trend change in bonds” in which investors in long-term bonds would stop making money.

Let’s take a breath. For one thing, no one knows where interest rates are headed. Moreover, bond investors need not fear rising rates. Yes, bond prices decline when interest rates rise, but higher rates also mean higher yields on new bonds. Over time, those higher yields should more than offset lower prices.

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