The Message in Herding

Good Morning,

We are halfway through 2019; most of the stock markets globally are doing well, the bond market is struggling with low yields, but the operating environment around us is changing. Marketwatch released an article this week painting a less rosy picture of the stock market. In the article that the author mentioned two points worth noting:

1. Firms with $5 Billion on average are down 5% this year

2. Mega cap firms are leading the way of creating a false narrative for most market cap-weighted indices

This article is fairly brief, but it does provide good insight into what is going on in the market place. By pointing out that the stock movements this year have been dominated by the largest firms, this author sheds light on the concentrated nature of movements which is dangerous territory for investors. Stocks usually move in groups which give out hints about where we are in the economic cycle. When leadership is clustered within the largest stocks that is usually a sign investors are looking for safety. We are currently in one of the longest-running bull markets in history and political uncertainty has started to increase which would push investors to larger/safer stocks to limit their downside risk. The article references the MSCI World Index and when peeling back the layers the top 20 names are dominated by US companies that are in the Technology, Communications, and Health Care.

As a reader/investor, I would be paying attention to the fact that the top companies are domiciled in the US and are the ones considered to be the most financially sound. With all the political turmoil and uncertainty in the market, going to the biggest companies to weather the storm does make sense and the US market has had some of the best returns over the past couple of years. Piling into these stocks now could be characterized as chasing returns, which is not ideal nor leads to success but it serves as an indicator of what is going on right now. Despite the rosy returns there are negative undercurrents that are coming into the market quietly and it looks like the smart money is positioning for tougher times so maybe it's time we should take heed.



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