Displaying items by tag: stocks

(New York)

The S&P 500 experienced a correction earlier this year, and since February, has been stuck in a rut. While the declines were not terribly deep, the doldrums were very long lasting. In fact, this was the longest correction (without a rebound or a fall into a bear market) since 1984. That meant the market was in correction for 115 straight sessions.

FINSUM: The market has finally regained some momentum, but it feels odd that stocks have been gaining in the face of largely negative trade war news. Then again, stocks love to climb a wall of worry.

(Washington)

The trade war appears to be headed down a poor path ever more quickly, and in response, global stocks are seeing losses. The US is continuing to make threats about ever larger tariffs on its trading partners, and Trump is poised for a tense meeting with European Commission head Juncker in Washington today. The president yesterday referred to tariffs as the “greatest”, and the US put forth a $12 bn support package for American farmers hurt by tariffs.

FINSUM: Stocks don’t know what to do, as this trade war is growing increasingly difficult to handicap. Add to that the uncertain over global central bank policy, and we have a very nervy mix for markets.

(Caracas)

Investors will know that the stock market is supposed to be a good inflation hedge, but precious few developed market investors will have ever seen how a market (or people) actually reacts during a period of heavy inflation. For a practical example, look no further than the misery that has befallen Venezuela. Inflation currently stands at 46,000% and is expected to accelerate to 1,000,000%. The government’s printing presses can’t keep up. But how has the stock market performed? The country’s benchmark index is up 73,000% in the last year. Wealthy Venezuelans are using it like a bank, buying stocks to deposit cash, and selling them when they need a withdrawal.

FINSUM: This is something you read about but rarely see in practice. It is an absolute shame what is going on in Venezuela, but a good lesson about the interconnection between stocks and inflation in practice.

(New York)

One of the big conundrums in markets is that while it is practically gospel to diversify into a wide range of securities and asset classes, some of the best and most famous investors do the exact opposite. As evidence, just consider the investing styles of Warren Buffett, George Soros, or Bernard Baruch. Forbes has published a piece examining this seeming disconnect, and provides some interesting insights. According to Buffett, “Diversification is a protection against ignorance … [It] makes very little sense for those who know what they’re doing”. Baruch adds, “It is unwise to spread one’s funds over too many different securities … Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues”.

FINSUM: Okay, a couple of points here. Firstly, those investors can afford the big losses that can occur with a concentrated portfolio. And secondly, since they invest for a living, they have the time to devote to deeply understanding each of their holdings. For the 99.99% of people not in that group, diversification has major benefits.

(New York)

Despite a generally weak year in equities, the market is still very expensive. That said, not every sector is and there are still some bargains to be had. Interestingly, more than half the S&P 500’s sectors currently trade at a discount to their historical relative value (relative to the S&P 500’s P/E ratio). These include: Tech, Materials, Real Estate, Industrials, Health Care and Telecom. Telecom is 60% below its average relative valuation, for instance.

FINSUM: Interesting to see how many sectors are at discounts. That said, the problem with this view is that there are no catalysts to prompt a return to the mean.