Investment Outlook | Financial Services | Certified B Corp | Buffalo, NY
“Investing is the only business I know that when things go on sale, people run out of the store.” – Mark Yusko
This quote very well reflects the market psychology for what happened on last Friday and continued on Monday. The returns in the so called ‘FANG’ stocks (Facebook, Amazon, Netflix and Google) or the recently newly coined acronym ‘FAAMG’ (Facebook, Amazon, Apple, Microsoft and Google) have been the major drivers of the equity indices in recent years. As of June 7th the new acronym (FAAMG) accounted for about one-third gains in the S&P 500 so far in 2017 and about 55% of the performance in the NASDAQ year-to-date. This highlights the fact that although breadth has been choppy but most of the stocks have advanced (chart below), also reinforces the fact that most of these stocks which are up by over 25% ytd could have substantial drawdowns when investors sell en masse.
According to a recent note sent out by JP Morgan, it states that Passive and Quantitative investors now account for ~60% of equity assets (vs. less than 30% a decade ago). We estimate that only ~10% of trading volumes originates from fundamental discretionary traders. It also states that low volatility is not a new normal or fundamentally justified – it is result of macro decorrelation and massive supply of volatility through yield generation products and strategies.
Meanwhile the other positives have been the constructive developments in the Russell 2000 (small-cap) index and DJ transportation index. The Russell 2000 broke out its previous high it made in April 2017.
The Federal Reserve announced another rate hike this week, this time however, they did mention that they are monitoring the inflation rate closely which is below the Fed target rate of 2%. The FOMC (federal open market committee) sees one more rate hike for the rest of the year. The Federal Reserve also plans to reduce the balance sheet (planning to reduce asset holdings from $4.5 trillion to between 2/2.5 trillion dollars). As per the statement from the fed
“…reducing the Federal Reserve’s securities holdings will result in a declining supply of reserve balances. The Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis;”
And as for the uncertainty, which may increase volatility in near future I would like to quote Lee Freeman-Shor from his article titled “Being wrong and still making money” –
“As such, before you invest a cent into an investment idea, it is imperative to have a plan of action as to what you will do if you find yourself in a losing position. When losing, the successful investors I worked with planned to become either Assassins or Hunters. Assassins sold losing investments that fell by a certain percentage or that declined by any amount and showed no signs of recovery after a certain period of time. Hunters invested a lesser amount at the outset and with a plan of buying significantly more shares if the price fell. Hunters were also unafraid to sell if it became clear that they had made a mistake. The bad investors didn’t have a plan and consequently turned into Rabbits. When losing money, Rabbits neither bought more shares nor sold their holdings. Once forming an initial perception, Rabbits were achingly slow to change their opinion of a stock. Which tribe will you become a member of?”
This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Chintan Shukla, CFA and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. You cannot invest directly in any index and Past performance may not be indicative of future results. Investing involves risk and investors may incur a profit or a loss. The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. The Euro Index ($XEU) tracks Euro-Dollar. The Advance-Decline line index is a technical analysis tool that represents the total difference between the number of advancing and declining security prices. Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc. Goldfarb Financial is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. Raymond James & Associates, Inc., member New York Stock Exchange, makes a market in this Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet/Google (GOOGL). These securities are also followed by the Raymond James & Associates Equities Research Department.