Posts tagged: stocks

Is only a small minority of stocks actually driving market gains?

“Quick, before you read this post, ask yourself these questions:

1. What percentage of stocks beat their benchmark index over their lifetime?

2. What percentage of stocks have a negative return over their lifetime?

3. What percentage of stocks lose essentially all of their value?

Not sure? The answers to all three questions are below.


When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.


Key findings:

  • 39% of stocks had a negative lifetime total return (2 out of every 5 stocks are money losing investments)
  • 18.5% of stocks lost at least 75% of their value (Nearly 1 out of every 5 stocks is a really bad investment)
  • 64% of stocks underperformed the Russell 3000 during their lifetime (Most stocks can’t keep up with a diversified index)
  • A small minority of stocks significantly outperformed their peers (Capitalism yields a minority of big winners that all have something in common) Read more »

The current size of the Global Stock Market

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S&P 500: Sector Data as of March 31, 2015

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Who owns the US stock market?

Here’s a chart from Goldman Sachs’ Amanda Sneider breaking down the ownership mix since the 1945.


stock market ownership

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Stocks have outperformed every other asset in the long-run

Stocks have outperformed every other asset in the long-run. In shorter, specific periods however this can vary. Meanwhile, cash is in fact not king as it struggles to keep pace with inflation.

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Citi: equities no longer follow earnings

In the long run, earnings are the most important driver of stock prices. So, it would make sense that stock prices would fall if earnings expectations  fell and vice versa. But in recent years, that relationship hasn’t held.

“Markets stopped following fundamentals about two years ago,” said Matt King,  a credit products strategist with Citi. In a new presentation, King included a slide titled “Distorted Markets,”  which included the chart below.

cotd equities earnings

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Here’s A Look At Each Year’s Big Stock Market Sell-Off Since 1980

So far, 2014 has been a volatile year for the stock market. The S&P 500 has gone from its all-time high of 1,850 on January 15 to a low of 1,737 on  Wednesday. This is a brutal 6.1% intra-year decline. For the year, the S&P 500 is no  down 5.2%. However, these big intra-year drops are very typical of the markets.

Check out this chart from JP Morgan Funds’ David Kelly. According to Kelly’s  research, the average annual intra-year drop since 1980 is a whopping  14.4%. This makes this year’s sell-off look minuscule. More importantly, annual returns during these years have been positive 26 out  of 34 times. Yes, the recent volatility hurts. But it’s no reason to freak out.


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2014 Surprises

While we probably won’t see any surprises bigger than the one we saw in 2013, with the S&P 500 being up close to 30%, there are sure to be unforeseen events in 2014. I’m not sure anyone saw 30% coming with the headwinds we faced at the beginning of the year when we went through a tax hike, a sequestration that dragged on GDP, arguing about the fiscal cliff and risking default on our debt service, possible war in the Middle East and finally a government shutdown. One would think after reading all that, the stock market wouldn’t have been so kind all year long. However, we never even saw a full-blown correction of 10% or more, but that will happen at some point. So, while 2013 was pretty much a smooth ride there are bound to be some surprises in the new year that aren’t priced into share prices already.

Tapering Happens Too Quickly

When the Fed decided to slightly trim back its QE3 program by $10 billion a month, I called that the market was ready and wouldn’t sell-off and I said the $10 billion figure was more symbolic than anything else. I still believe the Fed wanted to taper slightly to see how markets reacted. The reaction was one of jubilation as all major indexes were up more than 1% that day which is bullish as it meant market participants took the news to mean the Fed thought the economy was strong enough to handle it. But unemployment also fell more than expected to 7% and GDP growth was raised to 4.2%. Might this give the Fed the ammunition it needs to really begin tapering in a meaningful way? I believe it could. I also believe a large taper isn’t priced into the market and any surprise from the Fed could cause the market to correct steeply. Read more »


How The Fed Creates Market Highs And Lows Whenever It Opens Its Mouth

Fascinating chart from Jerry Khachoyan at The Armo Trader  blog. Below (click to enlarge), Jerry shows how almost every market top and  bottom has coincided with an action or announcement from the Federal Reserve or  its FOMC

Fed tops and bottoms

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The Stock Market Is Presenting An Investment Opportunity We Haven’t Seen In At Least 25 Years

Goldman Sachs chief U.S. equity strategist  David Kostin flags an interesting development in the stock market in 2013: the  dispersion of individual stocks’ price-to-earnings ratios has fallen to the  lowest level in at least 25 years. In other words, as Kostin puts it in a note to clients, stocks with different  growth forecasts are now valued at similar multiples.


P/E dispersion in the stock market

Source: Compustat, I/B/E/S, and Goldman Sachs Global Investment  Research

How did that happen?

“Investor demand for ‘value’ has been pervasive,” says Kostin. “Low  valuation stocks have outperformed higher valuation peers by 12% in 2013 on a  sector-neutral and equal weight basis.” Kostin writes that the low dispersion of valuation multiples in the market has created attractive trading opportunities: Read more »


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