Name the two main factors which drove this decade-long bull market. Ours would be the Fed’s easy policy, and huge levels of corporate buybacks. Well, that second one, which has inarguably been at least a core pillar of the bull run, is ending. Companies are pulling away from share buybacks, lessening one of the big price drivers for the market. Buybacks have slipped alongside the market’s trouble, as companies are no longer stepping in to buy shares, sending buybacks to their lowest level in 18 months.
FINSUM: Do you remember the earnings recession that occurred for a few years during this bull market? Buybacks are what kept prices afloat.
Want to know one of the biggest risks in equity markets right now—parity, and we don’t mean between asset classes, we mean between investors’ portfolios. Momentum buying, or buying up stocks that have performed the best, has become such a hot strategy this year that both mutual fund holdings and hedge fund holdings look very similar. Everyone has the same basket of stocks, such as Mastercard, Paypal, Amazon, and Microsoft.
FINSUM: Since value investing has all but died—no one is interested in undervalued stocks—portfolio parity is increasing. This seems like a big risk that will magnify a reversal.
A year ago, the FAANGs were flying high. In the previous twelve months they had risen 52% against the market’s 13% growth. The group of tech stocks has since suffered, underperforming the S&P 500 in the last year. In fact, a group of very conservative stocks have been leading the way. Call them the “WPPCK” (not as catchy, we know), which is comprised of Walmart, Procter & Gamble, Pepsico, Costco, and Coca-Cola. This group has risen 27.1% in the last year versus the S&P 500’s 7.2% gain and the FAANGs’ 5.7%.
FINSUM: It is hard to imagine a less flashy group of stocks than these, but they have been strong and steady, which seems like a good formula for this unpredictable market.
Just three months after flashing a dreaded “death cross”, the Dow is now showing some very bullish indicators. The Dow is signaling a “golden cross”, or a strongly bullish sign. The last time the market showed this kind of technical sign was three years ago, a moment which was followed by a 30% rally. The “golden cross” is when the 50-day moving average passes the 200-day moving average, and is taken as a sign of when a rally becomes a longer-term uptrend.
FINSUM: We don’t give a lot of weight to technical analysis unless it is accompanied by some fundamental news. In this case the bullish signs seem to exist in isolation.
JP Morgan has plunged headlong into the ETF business since launching its first fund a few years ago. Now the asset manager has debuted a new broad equity tracker than undercuts the market on fees. JP Morgan’s new BetaBuilders US Equity ETF will track mid and large cap US stocks and will seek to track the results of the Morningstar US Target Market Exposure index. The fund costs just 0.02%, or $0.20 for every $1,000 invested per year, one basis point lower than its nearest competitor.
FINSUM: This is a good broad index tracker that costs next to nothing. We expect it will gobble up AUM nicely, but it remains to be seen how well its tracks the index versus competitors, as 1 bp is a tiny margin that could easily be eaten up by performance differences.