Week of November 30, 2015
Activity in the equity markets was subdued during the holiday-shortened week as good economic data offset heightening geopolitical tension between Turkey and Russia. The S&P 500 held basically flat, up just 0.04%.
The Dow Jones Industrial average fell by a similar picayune amount (down 0.14%), posting its first decline during a Thanksgiving week in four years. The Nasdaq Composite inched 0.44% higher. There are just six trading weeks left in the year, and many investors are hopeful given the historically bullish month of December. The S&P 500 has gained an average of 1.8% during the last month of the year since World War II. Will it happen again this year? We note this year could be different given an already healthy rise after the August correction, and the fact that we will probably witness a Federal Reserve rate hike during the month of December for the first time ever. The equity markets usually become more volatile and weaken immediately following a rate hike.
FANGs and Five Other Market Leaders
The woes of active management in 2014 were well chronicled when a lack of dispersion made beating the benchmark extremely difficult. Dispersion has returned for 2015, but in an extreme form that has made besting the benchmark just as difficult. Much of the performance of the S&P 500 so far this year is attributable to a select few stocks. Jim Cramer has popularized the acronym FANGs to refer to Facebook, Amazon, Netflix and Google. Ned Davis research expands this to “The Nifty Nine,” a tribute to the must own, high-flying stocks of the early 1970’s known as the Nifty Fifty. In addition to the FANGs, the Nifty Nine includes Priceline, Ebay, Starbucks, Microsoft and Salesforce. These nine names have gained on average 60% in 2015, and given their hefty market caps, they make up an oversized chunk of the market’s ~1% return year-to-date since the S&P 500 is a market-cap weighted index. By comparison, an equal-weighted version of the S&P 500 is actually down year-to-date. This is has made it especially hard for active managers in 2015 with any kind of value bias. According to Ned Davis Research, the price-to-earnings ratio of the Nifty Nine is 45x, double that of the S&P 500.
Buyback Boom Continues
Through the first three quarters of 2015, more than $515 billion has been spent by U.S. companies repurchasing their own shares. This is the highest pace through the first nine months of the year since prior to the financial crisis. Additionally, the announced plans for future buybacks is the highest in history. And, unlike performance for the S&P 500 this year where gains have been concentrated into a few names, the usage of buybacks has been widespread. More than 20% of all companies in the S&P 500 have reduced their share count by at least 4% over a trailing twelve-month period. This is the seventh quarter in a row with activity levels this high. The amount of buybacks is creating the illusion of earnings growth. According to Factset, earnings were down 1.3% for the third quarter, but earnings per share rose 3.1% because of fewer shares outstanding.
Buyout Boom Too, At Least in Tech
Companies are not only buying back their own shares, they are buying other companies at a record pace too, at least in the tech space. So far in 2015, the value of tech deals has exceeded $570 billion. This is more than double the value of transactions in 2014 and surpasses any full-year level on record with more than a month remaining, according to Dealogic. Two large deals are skewing this figure higher (Avago’s acquisition of Broadcom for $37 billion and Dell’s purchase of EMC for $67 billion), but there has been good breadth in the tech buyout space. There have been 79 transactions valued at $1 billion or more, which is also an annual record high.
Fun Story of the Week
It won’t be long before the end-of-year “Best of” lists of books, music, movies, etc. begin appearing as pundits and critics attempt to chronicle and label 2015. No matter what they say, 2015 may go down as the year of the runaway dirigible. This year witnessed an unusually high number of large inflatable balloons that snapped their tie lines and floated away. The most notable of these occurred in late October when a $185 million Defense Department blimp used to for missile surveillance broke free from its moorings in Maryland and drifted north. Two F-16s were called in to chase it down. But this wasn’t the only incident. In Illinois, a few days before, Mickey the Molar broke free from All Smiles Dental and was last seen heading toward Wisconsin. On Halloween, a 25-foot tall pumpkin balloon broke free in Arizona. And, in August, a 40-foot tall Minion from the Despicable Me movie franchise stopped traffic after it broke loose and landed on a roadway.
Please feel free to forward this commentary to family, friends or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks.
* The Dow Jones Industrial Average is an unmanaged group of securities demonstrating how 30 large publicly owned companies have traded and cannot be invested into directly.
* Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index.
* Past performance does not guarantee future results.
* Charts and graphs should not be relied upon as the sole basis for any investment decision and are for general informational purposes only.
* Consult your financial professional before making any investment decision.
* This newsletter was prepared by CWM, LLC.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
Wall Street Journal, November 2015, http://www.wsj.com/articles/is-the-surge-in-stock-buybacks-good-or-evil-1448188684
Financial Times, November 2015, https://www.ft.com/intl/cms/s/0/b73d74c6-938c-11e5-b190-291e94b77c8f.html#axzz3shPoaew4
Wall Street Journal, November 2015, http://www.wsj.com/articles/the-new-boom-in-tech-1448251049
Barron’s, November 2015, http://www.barrons.com/articles/good-data-bad-geopolitics-leave-stocks-flat-1448691529