AdvisorShares Weekly Market Review – Week Ending 3/2/2018
Highlights of the Prior Week
Trade Wars! Give Me Those Trade Wars!
Markets tumbled last week for many reasons potentially as Barron’s blamed FOMC Chair Powell citing the potential need for four hikes this year, long awaited wage inflation, higher interest rates (although they were actually steady last week), concerns there may be no infrastructure plan from congress and an “easy to win” trade war proposed by President Trump consisting, for now of a 25% tariff on steel and aluminium.
Interestingly, markets were up of Friday, after a bad start on the heels of the trade war tweets. For the week the Dow Jones Industrial Average fell 3.06%, the S&P 500 was down 2.04%, the NASDAQ slid 1.12% and the Russell 200 dropped 1.02%.The month of February closed as the first down month since October 2016 with all four dropping; Dow -4.29%, S&P 500 -3.89%, NASDAQ -1.83% and the Russell 2000 -3.94%.
The title of this week’s update was inspired by Bill Murray as lounge lizard Nick Winters singing about Star Wars on Saturday Night Live. We admit to being baffled by the trade war threats emanating from the First twitter account as we would like to give the White House the benefit of the doubt for knowing what a bad idea tariffs can become (Smoot-Hawley). The President’s detractors will argue he actually doesn’t know any better and his supporters might counter The Art of The Deal, which of course is the book President Trump wrote about deal making. We won’t guess what is really going on.
It was widely reported that technology grew to take up 25% of S&P 500. Sector weightings in the index can give great clues for signs of excess in markets as was the case with energy growing to more than 30% of the S&P 500 in the early 1980’s, tech getting to 30% 18 years ago and financials at 22% at the peak in 2007. Where tech is often the largest sector in the index, 25% is less troublesome than if some other, usually smaller sector had become that large. For our money, 30% is unsustainable and tech at 25% is merely troublesome and an overweight now, to tech might not be prudent.
Barron’s tried to convey concerns about the high yield market recently voiced by Martin Fridson. Candidly, the point wasn’t well articulated but Fridson believes that price movement of high yield bonds are not doing what they “should” relative to their standard deviations. There are potentially implications related to indexes being flawed which could impact manager decisions, Fridson though is not sure what to make of this but it seems like a late cycle observation. There are a couple of possible takeaways for investment advisors looking to build portfolios for clients. One is that if a company is fundamentally capable of paying its bills then their debt issues are likely to fare well, but indexes don’t necessarily attempt to make that distinction. The other takeaway is bigger picture in nature and a point we have made before. There is no playbook or blueprint for how to emerge from ZIRP. Years of post-crisis policy could easily continue to cause distortions in various markets that can’t easily be foreseen which places a lot of importance on proper diversification in case there is some sort of narrow based calamity, like from some market segment being mis-priced.
Bloomberg had an interesting article about the extent to which passive investing is now actually active investing because of how many indexes are now available. Choosing an index is an active decision. We come at it slightly differently in believing that most use of passive funds is done in active, even if not very active, strategies. Even rebalancing is an active decision. From the article:
The Bernstein strategists base their conclusions around the millions of indexes in existence, which far surpass the number of single securities. Do a little math and the madness is clear: with 3,000 easily-investable stocks, the number of possible combinations to turn into an index is a Googol (that number, written out, would be 1 followed by 100 zeros.)
A very smart, retired cereal company employee cracked the lottery’s code and made a fortune:
That’s when it hit him. Right there, in the numbers on the page, he noticed a flaw—a strange and surprising pattern, like the cereal-box code, written into the fundamental machinery of the game. A loophole that would eventually make Jerry and Marge millionaires, spark an investigation by a Boston Globe Spotlight reporter, unleash a statewide political scandal and expose more than a few hypocrisies at the heart of America’s favorite form of legalized gambling.
Jalen Rose thinks college basketball players should boycott March Madness:
In the wake of a wide-ranging FBI investigation into corruption in college athletics, the NCAA is at a crossroads. While the investigation is currently limited to some of the major programs in college basketball, it’s likely just the tip of the iceberg as far as secret and illicit payments in college sports goes. The system is broken. Everyone knows it’s broken.
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, Awful Announcing