AdvisorShares Weekly Market Review – Week Ending 2/23/2018
Highlights of the Prior Week
Markets Digest Massive Treasury Auction
Last week, we asked if the bounce could continue and it was looking like the answer was no until Friday’s big up day. For the week the Dow Jones gained 0.39%, the S&P 500 was up 0.56%, the NASDAQ jumped 1.36% thanks to some FANG strength and the Russell 2000 eked out 34 basis points. The VIX danced around 20 for most of the week before cratering on Friday down into the 16’s. As several people, including Eddy Elfenbein from Crossing Wall Street, have noted, the profound lack of volatility in 2017 was the abnormal event not what has happened so far this year. It won’t end badly in terms of the market somehow doing something different but the lack of volatility leading to complacency in the form of performance chasing could lead to more individuals panic selling when the cycle ends.
The treasury market choked a little on a quarter of a trillion dollars in auctions. Barron’s reported two year paper going off at 2.25% sending three month bills to 1.64% and the then year getting as high as 2.94% before backing down to 2.87% at the close on Friday. Increasing deficits and debt are a source of upward pressure on rates which poses a direct threat to higher yielding stocks; why take equity market volatility when you can get the same yield from the bond market? Dividend investing has generally been a strong performer in the bull market but no strategy can be the best at all times and any strategy could be the worst at any time which is an argument for owning stocks with many different attributes.
The eagerly awaited letter from Warren Buffett and Charlie Munger came out over the weekend and as always created some buzz or at least some interesting things to ponder. Buffett wrote at some length about having taken a 38% stake in “travel center operator” Pilot Flying J which in addition to gas stations offers food, showers, wifi, battery charging and other conveniences which seems like a low tech business with a high tech twist. Buffett also discussed his “bet” made ten years ago that wagered that the S&P 500 would outperform hedge funds, a bet of course he won. The tone of the letter seemed to focus on the the fees that investors pay for certain types of management when they could the job done for a few basis points in an S&P 500 Index fund (more on that below). Owning an index fund can get the job done of course but Buffett’s view does give credit for a lot of rational behavior that is not common to many investors.
Well known hedge fund manager David Einhorn talked last week about his poor investment returns as his value style has been out of favor relative to growth. We talked quite a bit about style dispersion last year in these commentaries pointing to yield curve dynamics, flattening has had the historical tendency of favoring growth. The reason for this has to do with how companies access capital, either through the equity market or the debt market. This year the curve has had periods of both steepening and flattening but growth has continued to outperform. While we do not doubt that value will rotate back into favor at some point, there is no reason for advisory clients to be exposed to only one style. They both take turns leading and guessing which one will do better for the next year is an unnecessary bet. One proxy for Einhorn’s, value oriented hedge fund was up 1.5% in 2017 versus a gain for the S&P 500 of 21%. Clients don’t get too many years where the market goes up 20% and missing any of them can lead to serious financial plan impairment.
Harvard’s infamous class of ‘69 thinks the school’s endowment should ditch the hedge funds in favor of an overweight position to ETFs tracking the S&P 500. Here’s what Bloomberg has to say:
But if Harvard’s alumni are still tempted to bet the school’s treasure on the S&P 500, they should ask themselves how they’ll feel when the endowment tumbles 46 percent, as it would have from April 2000 to September 2002, or 53 percent from November 2007 to February 2009. My guess is the S&P 500 won’t seem like such a savior after all.
Here’s an interesting read about search and rescue volunteers:
It’s cold and windy. Visibility is low. No one wants to be in the field on days like this. But, as Rocky, a veteran member once told me, only half joking, “We’re mountaineers. We suffer. It’s what we do.” That suffering is accepted because this is what we volunteered for (and almost all of us are truly volunteers – only the sheriff and a few others are paid). It’s made tolerable knowing that there is someone worse off, someone who needs us.
Confused and concerned by the college basketball revelations? Yahoo has you covered:
The documents tie some of the biggest names and programs in the sport to activity that appears to violate the NCAA’s amateurism rules. This could end up casting a pall over the NCAA tournament because of eligibility issues. There’s potential impermissible benefits and preferential treatment for players and families of players at Duke, North Carolina, Texas, Kentucky, Michigan State, USC, Alabama and a host of other schools. The documents link some of the sport’s biggest current stars – Michigan State’s Miles Bridges, Alabama’s Collin Sexton and Duke’s Wendell Carter – to specific potential extra benefits for either the athletes or their family members. The amounts tied to players in the case range from basic meals to tens of thousands of dollars.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Zerohedge, Bespoke Investment Group, CME Group, Narrative.ly, Yahoo Sports