Market Commentary 1/10/2020
2020 is off to a strange start. The Dow hit 29000 for the first time today and the leadership is very narrow. Just 7 large cap stocks drove almost the entirety of the Dow’s move. Expanding out to the S&P, gains are equally narrow with the 5 largest stocks dominating the capital gains.
Why is this happening?
I cannot say for sure, but my guess would be complacency. Geopolitical tensions have been greatly mitigated through resolutions in the major issues.
- Trade has calmed down with substantial progress toward a phase 1 deal with China
- Iran seems to have backed off which is allowing us to avoid or at least delay military conflict.
- Brexit appears to be resolving. There are many differing opinions as to what the ideal terms would be, but the level of uncertainty has been reduced. We now know approximately what is going to happen and people can plan accordingly.
- The Fed is in stability mode with no changes to the Fed Funds rate anticipated for a while.
As large caps are more international than small caps, it is unsurprising that the lessening of geopolitical risk would disproportionately be reflected in the big stocks.
We think this favoring of large caps is being amplified by a renewed public demand for ETFs. When the broad market keeps melting upward, ETF’s are seen as the ideal vehicle to allow one to passively participate in the gains.
We believe there will be a day of reckoning when the herd goes the other way, but as long as the good times remain, ETF’s look to keep growing. I continue to view market cap weighted ETFs as dangerous vehicles with the potential to systemically damage the market.