14 Mar ARE MARKETS REVERTING BACK TO OLD NORMALCY?
Are the markets reverting back to old normalcy? As widely discussed growth (aka indexing) has greatly outperformed value. It commenced about 12 years ago but has been on steroids since 2014.
In years past fundamental analysts scoured the market place for underfollowed companies in sectors that were thought to rebound in a changing geopolitical and macro-economic environment. Yesteryear strategy was buying a position in these companies and wait for the investing public to recognize the value as conditions evolve.
Today it is all about momentum. Buy the most widely followed and over owned stocks believing that other people will buy the same shares making the shares even more over owned and over followed. In my view indexing and passive investing has contributed greatly to this process.
Is this changing? Bloomberg writes buying the unloved and under followed issues are beginning to payoff handsomely. A basket of the 50 S & P 500 companies with the least analyst coverage produced a total return over the past twelve months that is 68% greater than buying the S & P 500 index.
Bloomberg states a reason for this massive over performance is “less analyst coverage equates to less ownership and negative news will not have the same outsize effect as positive news.”
Bloomberg also writes “given the changes to the S & P indexes last year, that means technology’s prognosis rest primarily on two companies: Microsoft and Apple, which have a combined 35% weighting in the technology index.” Moreover technology comprises a whopping 25% of the S & P 500’s capitalization.
Wow! To write the incredibly obvious, what happens if sentiment rapidly changes as was the case in late 2018?
Commenting about yesterday’s market action, equities gained as data signaled a resilient economy and modest inflation pressure. Oil rose to a 16 week high on declining inventories and the first drop in American production since December 1.
Last night the foreign markets were up. London was up 0.70%, Paris up 0.62% and Frankfurt up 0.12%. China was down 1.2%, Japan down 0.02% and Hang Sang up 0.15%.
The Dow should open weaker on trade and Brexit angst. The 10-year is unchanged at 2.63%.