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There was little reaction to the Brussel bombings.  Have all become inured, believing that such events are insignificant and now part of everyday life?

Speaking of which, has everyone become complacent believing that indexing is the pathway to riches?  According to the Financial Times, 98.9% of active US stock managers underperformed the indices during the past 10 years.  Wow!  I guess blindly investing in the indices is the potential pathways to riches and to heck with any macroeconomic thought or investment rationale.

I ask is this underperformance the result of the massive proliferation of ETFs and HFT which has skewed returns to only the mega capitalized growth issues, the issues that have the highest capitalization?  As inferred, ETF and HFT strategies are linked to capitalization where the big become bigger and the small become smaller.  There are now more ETFs than listed securities.

Yesterday Goldman wrote that the valuation difference between the small cap issues and the large cap issues is the widest since at least 1980 where the small capitalized issues are trading around a 50% discount to their large brethren.  Historically it is the inverse.

I ask is this environment a function of ETFs and HFT which largely ignores the smaller concerns, a major reason why virtually all active managers have underperformed the indices?  I think yes.

Four years ago I was writing the US is politically on undergoing a tectonic change.  Wow!  I did not realize how prophetic my comments have become.

Today I believe the markets are potentially on the verge of a tectonic change where the averages move sideways for a prolonged period of time and the typical issue vastly outperforms, the result of massive ownership of the former and no ownership of the latter.

The evolving environment may be amplified by the collapse of global order as the US has publically abdicated its 70 year role of the unspoken global policeman.

The violence/unrest/distortions occurring since this abdication cannot be forced back into the proverbial bottle.  As noted many times approximately 48% of the S & P 500 revenues and 55% of its profits are generated by trade, trade that may potentially slow given rising global unrest.

Radical thought that the individual issue will outperform the indices for a prolonged period of time for the reasons listed above?  Perhaps but so was my view four years ago that politically the US was undergoing a tectonic change.

What will happen today?  As noted there was little reaction to the Brussel’s bombing as value continued to shine.


Last night the foreign markets were mixed.  London was up 0.07%, Paris up 0.29% and Frankfurt up 1.08%.  China was up 1.16%,  Japan down 0.28% and Hang Sang down 0.25%.

The Dow should open quiet as the first quarter of 2016 appears to be one for the record book in many dimensions.  The 10-year is up 1/32 to yield 1.94%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.