By Maurice Stouse, Financial Advisor and Branch Manager
As bond yields have risen for most of this new year (the bellwether 10-year US Treasury is at 1.92% as of this writing) and that has had an impact on equity and bond markets. For equities, the NASDAQ, S&P and Dow are all negative YTD with the NASDAQ the most affected. The NASDAQ represents over 3500 stocks while the Dow represents thirty stocks, and the S&P represents 500 stocks. It is significant to take note that S&P 500 makes up over 70% of the value of all US traded stocks.
Why have the markets seen negative performance for most of this year? Take note that certain “sectors” – the eleven subsets of the market are not all equally weighted. The S&P 500 has 28% of its value in technology (TEC) stocks yet only about 3% in Energy Stocks. The TEC sector is down over 9% so far this year while the ENE sector is up over 23%. If there is almost ten times the value of TEC stocks vs ENE stocks, it might make sense to see that that is what has driven a lot of the volatility and performance. Most of the household name TEC stocks are negative for the year. The main reason that TEC stocks have been more volatile is that when bond yields rise, investors (large institutional investors) historically have sold lower dividend stocks and rotated to higher dividend or so-called value stocks (TEC representing so-called growth stocks).
So, when you see money coming out of one sector and wonder where it may be going or rotating to, the above is one significant, and recent example. That may be leaving individual (as opposed to institutional) investors wondering what to do now. It is important to note that diversification, patience along with staying informed and aware have served investors well. The Wall Street Journal recently had an article that quoted the legendary value investor Benjamin Graham. Graham was quoted to have said “I don’t know, (after many years of experience) what the market is going to do but I do know what investors are likely to do.” In other words. We tend to see that as investors being reactive vs being proactive. A proactive strategy to us is one where goals, time lines and risk tolerance are well known and thought through and then a strategy is adapted and followed over time. Human nature and instinct are motivated by survival and hence investors might give up hope at the worst possible time. And timing is a key. When markets move, they move swiftly up or down. It is next to impossible to know when those movements are going to happen. Have a look at this excerpt from Raymond James’ Weekly Headings on January 28th. It highlights the significance of time in the market vs timing the market. The numbers are based upon the annualized rate of return of the S&P 500 over the past 20 years, which was approximately 5033 trading days:
Average return for staying invested over the past 20 years: 7.3%
Missed the best 5 days and your return would have averaged 4.9%
Missed the best 10 days and your return would have averaged 3.2%
Missed the best 15 days and your return would have averaged 1.8%
Missed the best 20 days and your return would have averaged .6%
On the other hand, what if you “known” which days to be “out” of the market:
Missed the worst 20 days and your return would have averaged 15.2%
Missed the worst 15 days and your return would have averaged 13.7%
Missed the worst 10 days and your return would have averaged 12.1%
Missed the worst 5 days and your return would have averaged 10.1%
The challenge is, who knows when those days will be? As the legendary Peter Lynch once said: “they don’t ring a bell at the top and they don’t ring a bell at the bottom.” Again, market rallies and sell offs happen in a noticeably brief period making it almost impossible to predict.
We also encourage our clients to think about emerging trends which might be worth considering in their long-term strategy. We will start with semiconductors or computer chips. We have seen and heard a lot about the disruption that chip supply shortages have brought about. Chip production capability, advanced chips, have crimped revenues of many firms and contributed significantly to inflation. We note that advanced chip design is mainly in the US and yet the advanced chips are manufactured overseas (Taiwan is the leader). Take note of the foundries (chip manufacturing plants) that are under construction or being planned in the US. Two of note are the multibillion-dollar facility that Taiwan Semiconductor is building in Arizona and the recently announced multi-billion-dollar facility to be built in Ohio by Intel. These are just two examples but nonetheless a trend we think is important. The US sees the economic and strategic need to have these foundries in the US vs overseas.
The same can be said for battery production (for electric vehicles – EVs). The US is a world leader in possessing the natural resources that go into these batteries yet is the world’s laggard when it comes to refining the minerals and manufacturing the batteries. That too is changing as seen in the focus of the US government and the commensurate activity in building the production capability.
How impactful could this be? Look at liquified natural gas (LNG). The US now leads the world in the export of this high in demand, cleaner burning fuel. It is used to create electric at power plants and to heat homes and power natural gas fueled vehicles. Many years ago, the multi-billion-dollar investment in the infrastructure that was needed, started to take shape. Many wondered why so much money was going into liquefaction and export facilities as the world demand was not seen. Fast forward to today and you can see China’s demand has grown 50% which adds to the already resilient demand from Taiwan, South Korea, and Japan. And now the US has come to the aid of western Europe as countless ships are making their way there now loaded with LNG. The result has added to the earnings of ENE companies which are experiencing record revenues and hence cash flow and profitability.
Wrapping it all up we see that while the markets remain more unstable than they have been in the recent past, investors can continue to position their investments to participate in the ever-growing areas of opportunities represented in the world today and tomorrow.
The First Wealth Management is located at First Florida Bank, a division of The First Bank, 2000 98 Palms Blvd, Destin, FL 32541. Branch offices in Niceville, Mary Esther, Miramar Beach, Freeport, and Panama City. Phone 850.654.8122.
Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC, or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc.
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Views expressed are the current opinion of the author, not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.
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Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
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