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July 2017

A Note from the Team

     The world and U.S. economies continue to grow. However, it makes sense to point out a few peculiarities present in today’s investment environment:

     Sooner or later the stock market will correct. We have no idea when stock market volatility will increase, but it has been 251 trading days since the last 5 percent stock market “drawdown”, and 345 days since the last 10 percent price decline. Historically, the average time between these types of corrections is 51 days and 229 days respectively.

     The stock market has set 24 new highs this year. Remarkably, the market’s maximum “drawdown” this year never exceeded 3 percent. If you have been waiting for a reasonable drawdown as a sign to put money to work, you are still waiting. The lack of volatility the stock market is experiencing is very unusual. This year’s 3 percent maximum drawdown in stock prices is the second most shallow first-half drawdown in 89 years.

     This is worth restating and repeating. The last time the market’s maximum decline shallower than this years max decline (through the first 6 months) was 1928.

     The S&P 500’s return so far this year has been dominated by five stocks. The FAAMG constituents are Facebook, Apple, Amazon, Microsoft and Google. These five stocks are the largest (by market capitalization) stocks in the S&P 500.  In fact, they constitute 13 percent of the S&P 500 index capitalization, showing the S&P 500 is a somewhat growth-oriented concentrated index. Even more surprising is the fact that these five stocks have constituted a full 27 percent of the S&P 500 return over the last 12 months. If you were unfortunate enough to only have owned the other 495 stocks in the S&P 500 you would have underperformed the index by 6.6 percent.

     All this is to say that while the market is continuing to enjoy prosperity and in a strong up trend, it is important to note that such a run is uncharacteristic. It is therefore important to be cautious while investing in this market.

More next month…


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