Sources: Equity Market and Fixed Income returns are from JP Morgan as of 06/09/17. Rates and Economic Calendar Data from Bloomberg as of 06/12/17.
There was a bit a volatility in the daily returns of the U.S. stock market last week as the S&P 500 Index declined in three of the five trading days and ended the week 0.27% lower. The tech heavy NASDAQ 100 Index felt the brunt of the selling pressure, however, with a daily loss of 2.4% during Friday’s trading session, resulting in a weekly loss of the same magnitude. The Russell Midcap Index fell 0.4% last week while the Russell 2000, which is generally considered to be an index of small cap stocks, gained 1.2%. This is actually the first time this year that small cap stocks have had a positive weekly return while both mid and large cap stock indices declined in value. Internationally, developed markets took a bit of a breather, falling 1.2% while emerging markets gained 0.4%.
The Federal Open Market Committee (FOMC) is scheduled to begin their two day meeting on Tuesday, June 13, and will conclude it with the likely announcement of a 0.25% rate hike on Wednesday, June 14. We do not expect a strong market reaction since this move is widely expected and thus already presumably priced-in but we will be paying close attention to the FOMC’s projections and Fed Chair Yellen’s press conference afterwards for additional insights into the future path of monetary policy.
Friday’s sell-off in technology stocks caught many investors by surprise, especially those that have embraced the “FAANG” (an acronym for Facebook, Amazon, Apple, Netflix, and Google that has also come to include Microsoft) trade this year. Combined, these six mega-cap stocks have had a median year-to-date return of over 34% prior to Friday’s sell-off and, because of their size, account for over 13% of the market cap of the S&P 500 and 42% of the NASDAQ. Some analysts are pointing to a note released on Friday by Goldman Sachs as the cause of the sell-off. In their research report, Goldman not only discusses the strong performance and size of the FAANG stocks but also the recent odd behavior of their stock prices. For example, for the past six months ending June 5, these stocks have exhibited lower volatility then any of the 11 GICS sectors, including the defensive consumer staples and utilities sectors. Further, FAANG stocks, since the U.S. Presidential election took place, have been positively correlated to bond prices, meaning that as rates rise, these stocks have fallen and vice versa – a relationship historically that has been the mirror opposite. This strange performance may mean that FAANG stocks are not only be included in growth and momentum strategies but also some strategies focused on low volatility.
This case is an important cautionary tale for investors and highlights the old adage that investors should “know what you own.” In many cases this may also mean, “know what your funds own.” A great deal of investors own FAANG stocks outright but may not appreciate the full exposure they have to this group of stocks resulting from the underlying holdings of their mutual funds or exchange traded funds (ETFs).
Important Information and Disclaimers
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Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.