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%.

kent
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.