18 Nov A RELATIVELY QUIET DAY
Markets were relatively quiet with attention focused upon increased lockdown measures, overshadowing vaccine optimism.
Several days ago, I referenced the probability of the events of last Monday and Tuesday occurring with the massive rotation from growth to value. It was extraordinarily small.
Yesterday Bloomberg reported two quantitative analytical powerhouse firms have been crushed in 2020. The performance of these “no risk funds” has been a “five sigma event.” Two Sigma’s flagship fund is down YTD about 23% and Renaissance’ “market neutral” fund dropped about 27% and its global equities fund down 25%.
Bloomberg states “quants rely upon data from previous time periods but the issue at hand today this data has no reflection of today’s environment.” These issues include negative interest rates, massive concentration of funds in a few companies and crowded trading strategies.
As noted many times, the only strategy that is performing is passive indexing. Indexing is now the market and has evolved into the most crowded trade in history as over 55% of funds are invested via this manner. Will indexing meet the same fate as every other fail safe and overcrowded strategy?
Unfortunately, only history will answer this question.
Speaking of indexing, Tesla is slated to join the S & P 500 in December. Tesla is worth almost $400 billion, making it one of the ten most valuable companies in the S & P 500. Many have questioned its profitability, the result of selling environmental tax credits and the lack of revenues as it is expected it will only deliver 500,000 cars in 2020.
I ask a different question. What impact will it have upon the valuation of other S & P 500 stocks? What S & P 500 company is going to be replaced and how much of other companies’ shares are needed to be sold to make accommodations. Typically, like value companies are replaced thus no great contortions on the other members of the index. Will it be an event, an event that further exacerbates the lack of performance of quant models and other popular trading strategies?
Bloomberg opined “When Tesla joins the S & P, we know the game is over,” referencing various points in history when the S & P 500 finally gives its blessings to an upcoming stock.
Bloomberg’s used Yahoo’s 1999 ascension and CBRE’s 2005 admission as evidence, today amplified by the massive capitalization of Tesla which only two years prior was “single digit weeks away from going into bankruptcy” according to its founder.
What will happen today?
Last night the foreign markets were up. London was up 0.18%, Paris up 0.43% and Frankfurt up 0.28%. China was up 0.22%, Japan down 1.10% and Hang Sang up 0.49%.
The Dow should open nominally higher following positive vaccine news. NASDAQ futures are nominally lower. Oil is up about 3% on “robust” Asian demand. The 10-year is off 3/32 to yield 0.87%.