If you find that your portfolio’s investment returns are dominated by a small handful of stocks, you are not alone. We have experienced the same thing.
Burton Malkiel (renowned author of the classic “A Random Walk Down Wall Street”) did a recent study about this concentration of returns and found the following: For the 100 years since 1926, the U.S. stock market has returned just under 11% annually. But only 3.4% of the stocks were responsible for all the wealth creation. The rest of the stocks combined didn’t produce net gains higher than 30-day U.S. Treasury bills. And over half the stocks in the market lost money. The generous average return came from a tiny handful of stocks.
On one hand, these results are discouraging. There seems to be a lot of wasted effort in investing, but it also shows the importance of good stock-picking. Our goal is to always hunt for the magic 3.4%.
INVESTORS STARTING TO FOCUS ON FUNDAMENTALS
The S&P 500 has risen 9.5% since the March 30 low (13% for Nasdaq). That is quite a move in two weeks! It was nice to see the stock market continue its winning ways on Monday and Tuesday in spite of the U.S. Naval blockade of the Strait of Hormuz. Investors may be starting to focus on fundamentals in addition to the war. This may include earnings season which started Monday.
Goldman Sachs kicked off earnings season with very good numbers but a disappointment in fixed income trading operations. The stock traded down. Hopefully, the market isn’t looking for perfection this quarter. Now the big banks report. This will give us an excellent opportunity to look at the health of the consumer.
Investors are also looking at inflation and how rising oil prices are impacting the economy. March CPI data was released last Friday. The headline number rose 0.9% month-over-month and 3.3% year-over-year. This includes the second-largest ever monthly increase in energy prices. However, turning to core prices (excludes food and energy), prices rose less than expected at 0.2% month-over-month and 2.4% annualized. This is a very good number. Of course the pressure of higher oil prices is not over.
It is good that investors are focusing on variables other than the war, but the damage to the global energy infrastructure has been severe. Even with a ceasefire holding, the physical damage to the petroleum system is extensive and will take months to work through. An EU airports trade group warned that without fully reopened Hormuz transits within three weeks, jet fuel shortages would be systemic across Europe. Investors won’t completely forget about the war especially since crude oil and stocks have been closely correlated (inversely) since the war began. See the graph below. Notice the blue line plunging (S&P 500) while oil (USO) spikes higher since early February:
Source: Bespoke Investment Group
It has been a while since we have seen so many attractive stocks. With the market peaking last October and March’s market dip, many stocks have become buyable again. Right now there is no shortage of new ideas. It is a stock pickers market.