AdvisorShares Weekly Market Review – Week Ending 6/9/2017
Highlights of the Prior Week
The Dark Knight Passes
The broad market benchmarks had a curious week. The Dow and the S&P 500 were very flat (up 27 basis points and down 32 basis points respectively) while the Russell 2000 gained 1.12% and the NASDAQ fell 1.59%, including a 1.82% drop on Friday alone for the NASDAQ. Barron’s attributed that Friday hit to concerns raised by a couple of brokerage firms that the recent outperformance of a handful of tech stocks (more on this below) might be overdone and due to mean revert. This rippled across the entire sector as both large cap and small tech focused ETFs declined the same 2.5%.
The yield on the Ten Year U.S. Treasury Note inched up four basis points to 2.19%. The FOMC is of course meeting this week and the expectation is that it will hike rates from the current 0.75%-1.00% range and then implement another hike later, possibly in December. Of course, the Fed Funds Rate moving higher while longer term market rates stay about the same or even go lower, creates a flattening trend that makes bank lending less profitable than if the curve is more positively sloped. On the rare occasion that the curve inverts, it can make the act of lending unprofitable so access to capital is impeded, which contributes to causing recessions. A flatter curve is directionally similar, potentially less lending activity, but the consequence is far less. Still though, bank stocks tend to live and die by this action. Bank and financial sector ETFs have struggled this year, far behind the S&P 500, as the curve has flattened.
Barron’s shared a fun fact that the NASDAQ has had an up day 70% of the time in 2017, which it says exceeds the 60% level for this stat from 1998 and 1999. Oddly enough, the NASDAQ was up 60% of the time in 2007 as well. By virtue of narrowing leadership in a few mega cap tech stocks, the tech sector weighting in the S&P 500 is 23%. That sort of weighting is more like a flashing yellow light as opposed to 17 years ago tech’s weighting was above 30%; a flashing red light. High valuations, and valuations are high, is not much of a predictor for market turns. A few years ago you couldn’t go a day without reading a warning about the CAPE Ratio being high and while it was, and still is, it foretold nothing. There is also no IPO frenzy creating new supply every day of companies with no revenue, let alone no earnings. We could have a bear market and tech could be the perceived loser but we won’t have a repeat of some past crisis, that’s not how it works. The next crisis, whenever it comes, will be its own unique event and not likely to be easily predicted. For anyone who is worried about tech valuations, the answer is simple, reduce exposure now while things are going well knowing that such a reduction could turn out to be wrong, or early if tech makes its way back to 30% of the index.
Although the Tour de France is still three weeks away, it seems right to invoke race announcer Paul Sherwen and say that someone threw a cat amongst the pigeons in U.K. politics. For the second time in less than a year, the sitting Prime Minister tried something electorally clever that backfired. Theresa May weakened her position in losing to Jeremy Corbyn and losing seats to the Labour Party forcing May to cobble together a tenuous coalition. While we make no claim of full comprehension of U.K. politics, this certainly won’t make the Brexit process easier.
Finally, a couple of random events from over the weekend. Puerto Rico voted overwhelmingly to become the 51st state, although the vote wasn’t binding and the turnout was small. And the country of Macedonia is considering a name change to appease Greece as it (Macedonia) tries to join the Euro and NATO.
Anyone engaged in social media knows that Adam West passed away at the age of 88. Rolling Stone tells us Why Adam West Was The One And Only Batman:
Batman wasn’t much of a hit in its time, axed after just three seasons; like so many other 1960s TV series from Star Trek to Gilligan’s Island to The Brady Bunch, it really needed to wait for the Seventies reruns to become a pop-culture colossus.
The action in emerging market exchange traded funds bears mentioning. The larger ETFs are up 15-20% this year after years of relative misery. As a building block of understanding, most investors would accept that a diversified portfolio would have exposure to foreign markets including emerging. The last few years of underperformance likely breeds impatience with the idea but it is important to remember that between foreign and domestic equities one must outperform the other in a given year and while someone could guess which will outperform this year, guessing is akin to hoping and hope makes for a lousy investment strategy. The trend of outperformance of one over the other tends to last for many years and then just reverses without there necessarily being an obvious reason. Is this the start of a multi-year run that will now favor foreign? If you don’t know, then it makes sense to have exposure to both.
Remember that brawl between the Giants and the Nationals that started between Hunter Strickland and Bryce Harper? Well, ESPN reported that MLB Pulls Hunter Strickland San Francisco Giants Ejection Jersey Auction:
Items auctioned cannot be in bad taste. Selling a jersey of a player who was involved in a fight that resulted in suspensions could be seen as hypocritical.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ESPN