Fans of market statistics may be curious to know that July 3 has historically been one of the most positive days for the S & P-500. Moreover, not only in July, but also in the year. The table shows the average index returns by dates since 1950. It is a pity that there is not enough data on the share of positive outcomes on each date. And today, it turns out that the seasonal factor favors bull speculators.
An indicator of market sentiment from Bank of America Merrill Lynch. This is a composite indicator, its components are presented in the table on the right. What is interesting — now the value is 2.2, that is, in the zone of the most negative sentiment. This, of course, is a paradox, since the market is near historical highs. We cannot recall a more explicit example of “pain gain” when the market is growing, but almost no one believes in this growth. For comparison, the indicator values are indicated on the scale at the moments of serious price lows (February 2016 and January 2019) and maximum (January 2018). For bulls, expecting further growth of indices from current levels, this is good information. Despite the fact that no indicator can guarantee anything, such a level of distrust and negativity in relation to the prospects of the stock market can become a support factor.
The situation on the long-term chart looks even more pessimistic than in 2008. This is despite the fact that the S & P-500 index itself is trading near a historical maximum.
Like any information, this can also be interpreted in different ways, depending on the subjective views on the market. We like this interpretation (not the forecast!): Although this chart does not tell us anything about possible rollback levels (on a monthly scale minus 10-15%, they are almost invisible), but from the point of view of time, the market is probably closer to a new cyclical minimum than to the maximum and subsequent prolonged fall.
As you know, the likelihood that the Fed will begin to cut rates in the near future (most likely in July) has increased markedly. Reduce or not reduce, a moot point. Whether or not the recession phase has set in, opinions are also divided.
We are more interested in how the stock market behaved in previous cases, when the rate began to decline in the absence of a recession. It is these data on the US stock market that are shown in the table above.
So, regardless of the period elapsed after the first decline, the index’s return was positive on different horizons, from 1 to 24 months. Here, as usual, it is worth warning that 6 cases are not the sample that guarantees the repetition of the result. But at least one should not expect a collapse if, in the current situation, the Fed nevertheless follows the expectations and starts a cycle of lowering rates.
Another illustration of the fact that updating (albeit insignificant) historical highs in the US stock market so far looks more likely than immediate stalling in the correction. This is a comparison of the S & P-500 with an indicator that, cumulatively, shows the difference between rising and falling stocks on the NYSE. Our practice shows that as long as the AD-Line is growing, it is very unlikely that the market will seriously fall (kickbacks do not count).
A reason for concern may be a divergence similar to the period August-October 2018 (marked by arrows) — when the stock index shows a new high, but AD-Line does not confirm it. And this is not some kind of alchemy, but a banal logic: if most of the shares in the index begin to decline, it is unlikely that its growth can be sustainable. Now the reverse situation is that the AD-Line, after a short pause, showed a new historical maximum, while the S & P-500 is not there yet. Although this does not guarantee 100%, the probability of the index reaching new highs, in our opinion, increases
A table that can hold some hotheads, who believe that the market is something like a casino, and «I will lose now, I will win back later.» The first left column is the drawdown of the portfolio. The second column shows how much the portfolio should grow in order to restore its initial value. The next three columns show how many YEARS will be needed to restore the portfolio to its original value with average annual returns of 10%, 7.5% and 5%. Take for example the drawdown of 50%. To restore a portfolio, you need to earn 100% for the rest of it. With an average yield of 10% per annum, this will take 7.27 years, at 7.5% per annum, 9.58 years are needed, and at 5% per annum, 14.2 years already. Intuitively, we all understand that. But with numbers in front of you, it may be much easier to control the risks.
Last week, the ratio of gold miners to gold prices (GDX / GLD, green line) added 3%, while the metal itself fell slightly in price. Such differences in the dynamics of the base metal and industry stocks occur periodically, and we have repeatedly considered them. But this time, the unusual thing is added by the fact that gold has not grown even against the background of a temporary, but confident risk aversion. This risk aversion reflected both broad asset classes (Trezheris in the black, stocks in the minus), and inter-sectoral dynamics of the stock market (in the positive, protective Staples and Utilities, in the minus Technology and Cyclicals). In my opinion, all together it increases the probability of catching up from the side of gold this week. Firstly, the leading dynamics of industry stocks is often a leading indicator for the metal, and secondly, there are no reasons for a sharp return of risk appetite to the markets, which can also help the demand for gold. Disclaimer: this reasoning is not a recommendation to buy gold (this decision is made independently)
Against the background of ongoing price wars between management companies and constant pressure on commissions, the question increasingly arises: «What do we pay an active manager for?»
Often this issue is provoked by the Criminal Code itself, which deals with the so-called “closet indexing” — that is, they take a commission as for active management, and in fact, they form a portfolio that is as close as possible to the index. In such a situation, it is really not clear why to pay them 1% per annum, when you can simply buy an index fund for 0.1% per annum.
Today in the Financial Times published an article that offers an interesting way to solve this problem. It proposes to use to calculate the «honest» commission of the so-called. «active share» of the portfolio. Usually, MCs publish the «active share» indicator, but investors somehow ignore this value, concentrating only on the amount of commissions.
How should this work? For example, some active fund declares that its management fee is 1% per year, and the “active share” of a portfolio is 50%. This means that the «passive» portfolio share also accounts for 50% of the portfolio and is managed as an index. That is, for this half of the portfolio a fair commission, for example, 0.1% per year. But then it turns out that the real commission for that part of the portfolio, which, in fact, is actively managed, is as much as 1.9% per annum. And this can already radically change the perception of investors and the competitive landscape.
In my opinion, a useful proposal that will help to look behind the scenes of the process and see who is worth.
An interesting article in Bloomberg about how business views differ from the largest providers of ETF- Blackrock and Vanguard. While Vanguard has relied on super-low commissions and price wars, Blackrock is trying to find ways to charge higher commissions for some products. So far they have done it well — the diagram shows that in the company’s revenues 48% comes from funds with a commission of 0.4% per year, while at Vanguard, which has relied on individuals, 92% of income comes from funds with an annual commission less than 0.2%. Higher commissions are willing to pay institutional and hedge funds, firstly, for niche ETFs and, secondly, for high liquidity, which allows them to trade large lots. We recently wrote that large investors are suspicious of “free” products and why. For now, Blackrock practice confirms this. But let’s see if the market will force them to reconsider their pricing policy.
Today, the whole world wonders what Trump’s 2 tweets mean, which brought down the Shanghai Stock Exchange index by 6%, and S & P-500 futures by 1.5%. Whether it is such a tactic of negotiations — to shock the partner at the last moment, or a signal of more serious problems in the discussion of tariffs. We do not know for sure, therefore we are more interested in facts. For example, the volume of investment in the American Trezheris from China (in billion $). After several months of falling in 2018 (the “toughest” period of tariff opposition), since December they began to grow again. Perhaps this readiness of China to support its western partner is material, says more than a thousand words. If so, then maybe Trump’s tweets look harsher than they really are. This is not a statement, but thoughts out loud. We think that a certain statement will be made by the response statement of the Chinese comrades, which will not be long in coming.