Retirement Watch Lighthouse Logo

Bob’s Journal for 3/7/2019

Last update on: Nov 22 2019

While the headlines focus on how the major stock indexes are doing, it’s important to examine the details of what’s happening within the indexes from time to time as well.

Looking under the hood of an index is important because a few stocks can lead the index higher or lower and hide what is happening to the rest of the stocks. The S&P 500, for example, is a capitalization-weighted index, so the stocks with the largest capitalization have the greatest weight in the index.

Today, the 10 stocks with the largest weightings in the S&P 500 comprise almost 21% of the index. Microsoft currently has the largest weighting at 3.69%. The rest of the top 10 are Apple,, Facebook, Berkshire-Hathaway, Johnson & Johnson, Alphabet Class C, JP Morgan Chase, Alphabet Class A and Exxon Mobil.

The first months of 2019 ushered in one of the best calendar year beginnings for the stock indexes, especially the S&P 500. The index has returned 11.64% for the year to date.

But suppose we give each stock in the index an equal weight instead of a capitalization weighting? The returns would be higher. The equal-weighted S&P 500 returned 14.06% for the year to date. Another way to look at it is that the average stock in the index is up 14.17%. So far in 2019, you could have outperformed the index by almost three percentage points simply by owning equal shares of each stock instead of relying on a capitalization weighting.

That isn’t always the case. In 2019, investors who have bought individual stocks instead of an index have changed their preferences dramatically compared to what they chose in 2018.

Over the last few years, the largest companies performed the best and drove the index returns. But so far in 2019, the largest 10% of stocks in the S&P 500 are up 10.99% while the smallest 10% are up 19.97%.

Another sign that investors’ preferences have changed is that the stocks which did the worst in 2018 are doing the best in 2019. The 2018 bottom-ranked 10% have returned 21.16% so far in 2019. The top 10% of 2018 have returned 12.55% in 2019.

One reason for this change is that companies that earn a greater percentage of their revenues outside the United States lagged in 2018 due to a strong dollar and concerns about trade conflicts. But that’s changed. In 2019, the 10% of stocks that earn the highest percentage of their revenues outside the United States have returned 20.49%. The stocks that have the lowest percentage of international revenues have returned 11.85% in 2019.

Clearly, there have been changes in the stock markets. Two external factors are likely causing those changes.

A major change is that the Federal Reserve has paused in its tightening of monetary policy. That made investors quickly shift from being risk averse to willingly accepting additional risk.

The other change is the recent run of reports which indicate that the trade conflict between the United States and China might be resolved.

A lot of investors are betting that these changes haven’t come too late. Both the trade conflict and tighter monetary policy did a lot of damage to the economy. They did so much damage that  the European Central Bank announced this morning that instead of tightening monetary policy as it had announced only three months ago, it would reverse course and begin a new round of stimulus.

The strong stock run of the last few months looks like a relief rally to me. The negative effects of the Fed’s tighter monetary policy haven’t fully worked their way through the economy and into corporate earnings. More surprises could be on the way for investors.

The Data

The latest surveys indicate manufacturing is growing but at a slowing rate.

The PMI Manufacturing Index declined to 53.0 from 54.9. New orders were at their lowest level since June.

The ISM Manufacturing Index fell to 54.2 from 56.6. Most components of the index declined.

Keep in mind that the readings of both indexes are well above 50, so they indicate manufacturing is expanding but at a slower rate than previously had been the case.

But the services sector still looks strong. The PMI Services Index increased to 56.0 from 54.2. This is the index’s highest level since July 2018. New orders were an especially strong component of the index.

The ISM Non-Manufacturing Index increased to 59.7 from 56.7. New orders also were very strong in this report, and exports contributed to a lot of the increase.

The Kansas City Fed Manufacturing Index came in at one, down from five last month. The reading indicates that manufacturing in the region is barely growing.

Consumer confidence, as measured by the University of Michigan, increased a bit after the government shutdown ended, but is still below December’s level. The latest reading is 93.8 for the end of February. This compares to 95.5 in mid-February and 91.2 when the shutdown was in full swing at the end of January .

A major boost to consumer confidence is the strong labor market. The private sector created 183,000 new jobs, according to the ADP Employment Report. And last month’s number was revised substantially higher to 300,000 from 213,000.

New unemployment claims decreased by 3,000. That also brought down the four-week average.

The latest Personal Income and Outlays report was composed of December’s data that was on hold because of the government shutdown plus January’s income component. January’s outlays still are on hold.

Income increased 1.0% in December, and then declined 0.1% in January. It was the non-wage components of the survey, especially self-employment income, that shifted. Wages increased 0.5% in December and 0.3% in January.

The spending data were consistent with the recent Retail Sales report for December. Consumer spending declined 0.5% in December, compared to a 0.6% increase in November.

The PCE Price Index, the Fed’s preferred inflation measure, increased only 0.1% in December and 1.7% over 12 months. The core index, which excludes food and energy, increased 0.2% for the month and 1.9% over 12 months.

New home sales provided some mixed news. The headline showed sales increased by 3.7% in December compared to November. But November’s sales were revised down significantly, making it easy to show an increase for December. The December sales were significantly lower than the sales initially reported for November. New home sales were down 2.4% over 12 months. The median sales price increased 5.0% for December but is down 7.2% over 12 months.

The Markets

The S&P 500 declined 0.67% for the week ended with Wednesday’s close. The Dow Jones Industrial Average fell 1.15%. The Russell 2000 tumbled 2.73%. The All-Country World Index, excluding U.S. stocks, lost 0.30%. Emerging market equities fell 0.63%.

Long-term treasuries gained 0.09% for the week. Investment-grade bonds rose 0.04%. Treasury Inflation-Protected Securities (TIPS) declined 0.14%. High-yield bonds retreated 0.14%.

On the currency front, the dollar rose 0.86%.

Energy-based commodities fell 0.95%, while broader-based commodities declined 1.18%. Gold lost 2.61%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book on said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

I’m a regular contributor to the blog. You can view my contributor page here.

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.



Log In

Forgot Password