September 23


S&P 500 – The Only Game In Town

SPY_2014_09_22By David Nelson, CFA

Yesterday’s selloff really started the night before with comments from China’s Finance minister saying that despite weakening economic indicators there would be no policy changes. In other words China was willing to live with less growth. At least for yesterday investors here weren’t willing and we saw selling across the board in energy and commodity related names. Despite what may be just another one or two day selloff there’s a sense of growing concern within the institutional community.

Last week the S&P* pushed to another all-time high on the heels of dovish comments coming from the Fed. What’s been lost in the repeated headlines of Dow and S&P records is large cap U.S. stocks have become The Only Game in Town. While they’ve been pushing ever higher, other markets with few exceptions have been struggling.

The underperformance of small cap stocks (IWM) this year has been well vetted by the press. The breakdown in correlation started early in 2014 and is just one of several divergences and potential Red Flags.


International markets have been a source of concern for some time. The Euro Zone makes up a large part of (EFA) iShares MSCI EAFE so it’s not surprising the relative performance chart comparing it to the S&P 500 is breaking to new lows. Europe is on the brink of another recession and in the early stages of a trade war with Russia as sanctions start to cut into all the players.


Perhaps the biggest disappointment for investors in the last several years is emerging markets. (EEM) iShares MSCI Emerging Markets ETF has been a popular proxy for those looking for growth and opportunity. While there have been some signs of stabilization in 2014 the ETF isn’t much higher than where it was 2 years ago. China and Brazil which make up a large portion of this index are performing a little better this year so I’ll reserve judgment for the moment.


One bright spot for emerging market investors has been Frontier Markets. (FM) iShares MSCI Frontier 100 ETF has outpaced the S&P 500 since its inception in 2012. Investors should take note that despite the great performance the time frame is relatively short and just 3 companies make up more than 15% of the fund. Two of the three are based in Kuwait.

The Truth

The truth is Portfolio Managers including yours truly continue to put money into S&P 500 names because it’s working. With few places left in the world to invest, equity managers continue to be comfortable in large cap U.S. stocks. Bulls can point to the following:

  • Q2 earnings came in strong.
  • M&A activity is alive and well
  • Fed seems unwilling to do or say anything that might spook the market
  • Inflation is benign
  • Fear trades like Gold are going nowhere
  • The U.S. continues toward energy independence
  • U.S. Markets continue to ignore rising geopolitical threats
  • What Could Go Wrong

Despite this good news the continued divergences are troubling. Most of the S&P has gone global with a big push into emerging markets to drive growth. Think back to every conference call you’ve listened to over the last few years and remind yourself just how much of it was dedicated to discussing the growth in emerging markets. The index is dominated by large multi-national names that are becoming increasingly dependent on overseas revenue. All of this begs the question; how can large cap multi-national companies continue to do well if their customers are not?

I don’t know the answer to that question and maybe that’s what bothers me.

*Belpointe’s BullFinder Tactical Portfolios are long SPY