Yesterday a SEC official warned that passive investing may pose a threat to investors as many may be complacent about the inherent risks involved. Warren Buffet once quipped if one cannot withstand a 40%-45% loss, that person should not be involved in the markets for it is not if such a decline will occur but rather as to when.
I think it is noteworthy Buffet’s average holding period of a company is 19 years not 19 seconds. Moreover his public stock holdings are concentrated. Six stocks comprise 70% of its portfolio and 10 companies’ represents over 80% its portfolio. One company is 19% and another is 17%.
In my view the financial alchemy that has flourished over the last 7-8 years is now becoming toxic for as Deutsche Bank stated earlier in the week 89% of all global assets are down for 2018, a loss of anywhere between 10% and 60%. The only “fail safe” idea that has not imploded is indexing into the popular indices.
Is the SEC concerned that indexing will also implode?
Yesterday I referenced JP Morgan’s research stating 90% of recent trading volume is the result of algorithmic trading and only 10% is from traditional stock research. Earlier I noted several market luminaries including the father of indexing—Vanguard’s Bogle—that returns for a typical 50/50 blended account will be 1.75% per annum over the next decade.
Many times I have opined the regulatory entities have sacrificed liquidity and capitalization for speed and cost of execution. The largest brokerage firms, which are owned by money center banks and the largest asset managers including Blackrock, Vanguard, and Fidelity have supported this shift emphasizing costs versus the ability to sell a security in a declining market.
The question at hand is what happens if the environment changes? As noted many times the macroeconomic and geopolitical changes are tectonic. Globally, economic nationalism is surging dominating yesterday’s geopolitical mantra of multi polarity. In other words, there is no interest like self-interest.
Yesterday was another difficult day. According to Bloomberg, trading on S & P 500 futures were halted several times before the market opened in an attempt to limit a waterfall decline, the first such halt in about 10 years.
Averages opened considerably lower but recovered the vast majority of the early morning declines. The NASDAQ 100 had the biggest reversal since April. Over ten billion in US equity shares traded yesterday, the tenth most active day in 2018 according to Bloomberg.
Last night the foreign markets were up. London was up 1.28%, Paris up 1.23% and Frankfurt up 0.54%. China was up 0.03%, Japan up 0.82%and Hang Sang down 0.35%.
The Dow should open modestly lower on the myriad of well-known fears but will the 8:30 Employment data influence attitudes?
Consensus is expecting a 195k increase in non farm and private payrolls, a 3.7% unemployment rate, 0.3% increase average hourly earnings, a 34.5 hour work week and a 62.9% labor participation rate.
The 10-year is up 3/32 to yield 2.89%.
Just as an aside, the media is frothing about the yield curve. An accepted reason for the recent volatility was/is the inversion between the three year and five year Treasury, an inversion of 1 basis point (0.01%).
I have been trading fixed income securities for over 25 years and I have never heard of yield curve between “threes and fives.” I consulted about 3 other trading desks and all were not familiar with this relationship.
Wow! Talk about the power of the blogosphere to invent something to explain significant market volatility. .