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%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.