This memo covers three ways in which securities markets seem to be moving toward reducing the role of people: (a) index investing and other forms of passive investing, (b) quantitative and algorithmic investing, and © artificial intelligence and machine learning.
Small caps have materially outperformed large caps in 2018, with the S&P SmallCap 600 Index outpacing the S&P 500 Index 7.80% to 2.58% between Dec. 29, 2017, and May 25, 2018. Below, I highlight the drivers of small-cap returns this year, and why I believe the trend could continue.
The U.S. inflation story made further inroads this month, with year-over-year price growth for consumers and producers alike hitting multiyear highs. U.S. consumer prices expanded at their strongest pace in more than six years, climbing to an annual change of 2.8 percent in May. Prices for final demand goods, meanwhile, grew 3.1 percent, their strongest annual surge since December 2011.
Investors and their advisors must be alert to managing both pre-tax and after-tax alpha in order for investors to realize the highest possible return from their taxable portfolios. Increasingly, the opportunities to accomplish both goals are within reach of investors through, for example, tax-advantaged smart beta strategies and tax-efficient vehicles such as ETFs.
There are many determinants of stock performance. Corporate earnings, fiscal policy and interest rates can all influence the equity markets. But equity returns are also dependent on where we stand in the economic cycle.
Massive investor popularity can produce some pretty strange circumstances in the U.S. stock market. Mark Twain said, “History doesn’t repeat itself, but it rhymes!” Today’s strange occurrence has been called a “zero cost of capital” and it rhymes with what happened in 1999-2000.
Interest rates continue their upward trend. In March, the US Federal Reserve (Fed) hiked the federal funds rate by 25 basis points to a target range of 1.5% to 1.75%, citing strength in the US labor market, a low unemployment rate and moderate economic growth.
Effective May 14, 2018, new regulations will be adopted aimed at increasing the transparency of bond pricing. The new rules require dealers of corporate, municipal and agency bonds to clearly disclose bond markups and provide retail investors with relevant price comparisons.
Investors often say they’re worried about having too much high-yield bond exposure so late in the credit cycle. But many are still chasing returns in equities and other assets with even higher risk. We’ve got a better idea.
Technology companies are known for innovation, and it doesn’t take long for a revolutionary new technology to take hold and become a part of people’s daily lives. In my view, investors shouldn’t be threatened by technology. Rather, they should be skeptical of companies not utilizing technology to its fullest potential.