NASDAQ better, Bear Market Checklist and Senior Portfolio Managers

By Jeff Kelly on July 7, 2017

“Whenever I see a stock market explode, six to 12 months later you are in a full blown recovery.”

Stanley Druckenmiller

The numbers for the equity market don’t tell much of a story this week. The S&P 5oo closed last Friday at 2423. As I write at mid-day Friday the S&P 500 is at 2426. The NASDAQ close last Friday was 6140, today currently 6162. But therein lies a pretty interesting story. The death of the NASDAQ and momentum stocks has been greatly exaggerated. In fact, as the chart below shows, momentum has outperformed the S&P 500 over the past week and looks to be breaking out. If you look at the stocks that make up the Momentum Index, you’ll find Banks, Technology and Consumer Discretionaries. JP Morgan and Bank of America represent over 10% of the index between the two of them. Microsoft, Apple and Nvidia are another 12% together. The top 10 represent over 41% of the Momentum Index according to MSCI. These are some important stocks that have very high positive correlations with the overall market inside of the Momentum Index. Therefore, I am incredibly interested in what is currently happening in this group of stocks. Chart courtesy of All-star Charts.

Momentum breaking out is not a characteristic of bear markets. The out performance of this group can signal better things later in the summer. We’ll watch it closely to see if this continues.

I saw the group of statistics below and found them compelling. The markets are always changing and evolving. The difference in composition of indexes across eras makes comparisons difficult. Data courtesy of Patrick O’Shaughnessy.

• In 1957, the S&P 500 consisted of 425 industrial stocks, 60 utilities and 15 railroads. Financial stocks were not added to the index until the 1970s. Until 1988, the composition of the S&P 500 was 400 industrial stocks, 40 utilities, 40 financials and 20 transportation stocks.
• In 1902, America’s largest company, U.S. Steel, employed almost 170,000 people with sales of $561 million or $3,340 of sales per employee ($90,000 in today’s dollars). Today, Facebook generates $2 million in revenue per employee.
• Fifty years ago, retail investors accounted for more than 90 percent of all New York Stock Exchange trading volume. Today, 95 percent of trading is performed by professional investors.
• Before the Securities and Exchange Commission deregulated the brokerage industry on May Day in 1975 and abolished fixed-rate commissions, it was extremely cost-prohibitive to trade securities on the exchanges. Trading costs, including bid-ask spreads and commissions, have fallen on the order of 80 percent to 90 percent since then.
• Mutual fund sales loads averaged 8 percent to 10 percent in the 1950s.
• The first stock market index fund wasn’t created until 1976. The first bond index fund didn’t come around until late-1986.
• The 401(k) is roughly 30 years old. IRAs aren’t much older. The entire concept of retirement is largely a 20th-century phenomenon. In the past, people didn’t really save for retirement because the concept didn’t really exist until World War II. People typically worked until they died.

When we do have a bear market I hope the “Senior Portfolio Managers” look a little more senior. From CNBC.

Not many check marks on the Citigroup Global Bear Market Checklist. Courtesy of Citigroup.

July has historically been a decent month for equities. Courtesy of LPL Research.

I hope your July 4th was great. Have a wonderful weekend.

Jeff