May 15,
2017
The Markets
Does performance tell the whole story?
American
stock markets have delivered some exceptional performance in recent years. Just
look at the Standard & Poor’s 500 (S&P 500) Index. Barron’s reported the S&P 500, including reinvested dividends, has
returned 215 percent since April 30, 2009. The index is currently trading 50
percent above its 2007 high.
The
rest of the world’s stocks, as measured by the MSCI EAFE Index, which includes
stocks from developed countries in Europe, Australia, and the Far East,
returned 97 percent in U.S. dollars during the same period. At the end of
April, the MSCI EAFE Index was 20 percent below its 2007 high.
If
you subscribe to the ‘buy low, sell high’ philosophy of investing then these
performance numbers may have you thinking about portfolio reallocation. However,
performance doesn’t tell the full story.
For
example, there’s a significant difference between the types of companies included
in the two indices. At the end of April, Information Technology stocks
comprised 22.5 percent of the S&P 500 Index and just 5.7 percent of the
MSCI EAFE Index. Financial stocks accounted for 14.1 percent of the S&P 500
and 21.4 percent of MSCI EAFE.
It’s
important to dig beneath the surface and understand the drivers behind
performance before making assumptions or changing portfolio allocations.
Even
so, European stocks have the potential to deliver decent performance this year,
according to Barron’s. “The case for
a revival in European stocks, particularly the Continent’s many multinationals,
rests in large part on expectations for improving global growth…This year
Europe’s GDP is expected to increase by about 2 percent, after growing 1.7
percent in 2016 – better than the U.S.’s 1.6 percent.”
Last week, the S&P 500 Index moved slightly lower.
Data as of
5/12/17
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
-0.4%
|
6.8%
|
15.8%
|
8.0%
|
12.3%
|
4.8%
|
|
Dow Jones Global ex-U.S.
|
0.6
|
11.4
|
15.6
|
-0.6
|
4.9
|
-1.1
|
|
10-year Treasury Note (Yield Only)
|
2.3
|
NA
|
1.8
|
2.5
|
1.8
|
4.7
|
|
Gold (per ounce)
|
0.3
|
6.2
|
-3.8
|
-1.8
|
-4.6
|
6.3
|
|
Bloomberg Commodity Index
|
1.0
|
-4.6
|
-1.5
|
-15.0
|
-8.9
|
-7.0
|
|
DJ Equity All REIT Total
Return Index
|
-1.4
|
1.2
|
1.9
|
8.2
|
9.7
|
4.9
|
S&P
500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude
reinvested dividends (gold does not pay a dividend) and the three-, five-, and
10-year returns are annualized; the DJ Equity All REIT Total Return Index does
include reinvested dividends and the three-, five-, and 10-year returns are
annualized; and the 10-year Treasury Note is simply the yield at the close of
the day on each of the historical time periods. Sources: Yahoo! Finance,
Barron’s, djindexes.com, London Bullion Market Association. Past performance is
no guarantee of future results. Indices are unmanaged and cannot be invested
into directly. N/A means not applicable.
the herd of unicorns is growing. Since 1996, the value of companies listed on American
stock exchanges has increased from 105
percent of gross domestic product (GDP) to 136 percent of GDP, according to The Economist. (GDP is the value of all
goods and services produced in the United States.)
During
the same period, the number of companies listed on American exchanges has
fallen from 7,322 to 3,671.
This
fact might lead you to surmise that a few businesses have become dominant in
their industries, but that’s not the case. Many companies are choosing to
remain private rather than issue shares through an Initial Public Offering
(IPO) and then trade on an exchange. Financial
Times explained:
“Over
the past 10 years the number of initial public offerings in the United States, and
the total amount of equity raised by them, are way down on historical averages.
If these had held there would have been more than 3,000 new public companies in
the past decade. Instead, we have had fewer than half the number of IPOs.”
Why
don’t the leaders of vibrant young companies want to issue shares? There may be
several reasons:
·
Technology-intensive
businesses may need less capital.
·
It’s relatively
easy to raise money in private equity markets.
·
Regulatory
requirements for public companies increase litigation risk from securities
class actions.
·
Private markets
are better at allowing companies to take a long-term perspective.
The
reluctance to take companies public has fattened the world’s herd of unicorns –
private firms worth over $1 billion that are not
subject to public-company standards for accounting and disclosure. There are
currently about 100 of them.
Weekly
Focus – Think About It
“It may be
possible to gild pure gold, but who can make his mother more beautiful?”
--Mahatma
Gandhi, Leader, Indian independence movement
Best
regards,
Womack
Investment Advisers, Inc.
WOMACK INVESTMENT ADVISERS, INC.
Oklahoma / Main Office: 1366 E. 15th Street - Edmond, OK 73013
California Office: 4660 La Jolla Village Dr., Ste. 500 - San Diego, CA 92122
Phone (405) 340-1717 - Toll Free (877) 340-1717
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Phone (405) 340-1717 - Toll Free (877) 340-1717
Website: www.womackadvisers.com
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*
These views are those of Peak Advisor Alliance, and not the presenting
Representative or the Representative’s Broker/Dealer, and should not be
construed as investment advice.
*
This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is
not affiliated with the named broker/dealer.
*
Government bonds and Treasury Bills are guaranteed by the U.S. government as to
the timely payment of principal and interest and, if held to maturity, offer a
fixed rate of return and fixed principal value.
However, the value of fund shares is not guaranteed and will fluctuate.
*
Corporate bonds are considered higher risk than government bonds but normally
offer a higher yield and are subject to market, interest rate and credit risk
as well as additional risks based on the quality of issuer coupon rate, price,
yield, maturity, and redemption features.
*
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities
considered to be representative of the stock market in general. You cannot
invest directly in this index.
*
All indices referenced are unmanaged. Unmanaged index returns do not reflect
fees, expenses, or sales charges. Index performance is not indicative of the
performance of any investment.
*
The Dow Jones Global ex-U.S. Index covers approximately 95% of the market
capitalization of the 45 developed and emerging countries included in the
Index.
*
The 10-year Treasury Note represents debt owed by the United States Treasury to
the public. Since the U.S. Government is seen as a risk-free borrower,
investors use the 10-year Treasury Note as a benchmark for the long-term bond
market.
*
Gold represents the afternoon gold price as reported by the London Bullion
Market Association. The gold price is set twice daily by the London Gold Fixing
Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy
ounce.
*
The Bloomberg Commodity Index is designed to be a highly liquid and diversified
benchmark for the commodity futures market. The Index is composed of futures
contracts on 19 physical commodities and was launched on July 14, 1998.
*
The DJ Equity All REIT Total Return Index measures the total return performance
of the equity subcategory of the Real Estate Investment Trust (REIT) industry
as calculated by Dow Jones.
*
Yahoo! Finance is the source for any reference to the performance of an index
between two specific periods.
*
Opinions expressed are subject to change without notice and are not intended as
investment advice or to predict future performance.
*
Economic forecasts set forth may not develop as predicted and there can be no
guarantee that strategies promoted will be successful.
*
Past performance does not guarantee future results. Investing involves risk,
including loss of principal.
*
You cannot invest directly in an index.
*
Consult your financial professional before making any investment decision.
*
Stock investing involves risk including loss of principal.
*
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Sources:
http://www.barrons.com/articles/europe-on-sale-time-to-buy-foreign-stocks-1494648930?mod=BOL_hp_highlight_1 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-15-17_Barrons-Europe_on_Sale-Time_to_Buy_Foreign_Stocks-Footnote_1.pdf)
http://us.spindices.com/indices/equity/sp-500 (Click on Sector Breakdown to view pie chart) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-15-17-S%26P_Dow_Jones_Indices-Sector_Breakdown-Footnote_2.pdf)
http://www.economist.com/news/business/21721153-company-founders-are-reluctant-go-public-and-takeovers-are-soaring-why-decline (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-15-17_TheEconomist-Why_the_Decline_in_the_Number_of_Listed_American_Firms_Matters-Footnote_4.pdf)
https://www.ft.com/content/9fcfb668-3409-11e7-99bd-13beb0903fa3 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-15-17_FinancialTimes-Relax_the_Rules_to_Kickstart_the_Stalled_IPO_Market-Footnote_5.pdf)
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