YCharts 2017Most charts of short-term market events are rubbish. But the one above is worth showing you, because I think it is a microcosm of a few important, bottom-line issues that make the current market environment a very tenuous one for investors who do not take a risk-averse core approach.
The chart compares the paths of the QQQ (Nasdaq 100 ETF) and SPHD (an ETF which tracks higher-yielding stocks within the S&P 500 Index which have exhibited low volatility relative to their peers in that index. I am NOT recommending any particular security here, but merely using these ETFs to represent different segments of the equity market. This only covers a month, so why do I think it tells us anything? It is because it shows us, in broad daylight, that there are two market segments (high yield stocks and big stocks listed on the Nasdaq) which are sometimes in sync, other times at odds with each other, but for the past couple of years have been like oil and water – they don’t mix with each other. They represent a sort of Civil War in the stock market that keeps repeating itself. And while the past month was just a month in our lifetimes, the chart you see above has been cycling back and forth for many months, with the Nasdaq 100 getting the upper hand in a record-setting way. Its outperformance of high yield stocks is a historically-wide gap, and so-called “reversion to the mean” will at some point occur.
Adobe StockFocus your eyes on the far left and far right of the chart, and in each case, you will see that these two market slices moved in entirely opposite directions. Bottom line: the “market” is not a unified collection of stocks, no more than the U.S. Congress is a group of 535 people that all act the same way. The question is why does this happen? A look at the sector allocation of these two ETFs goes a long way toward answering that question. Here it is:
YCharts 2017, as of Sept. 25, 2017I divided the 11 main stock sectors into 4 groupings. The first are the ones that contain businesses for whom their dividend payment and yield is a significant part of their attraction to investors. REITs, Utilities and Energy stocks make up the group, and you can see that they represent about half of the assets in in the High Yield ETF. How much of the Nasdaq 100 is in these higher-yielding sectors? Zippo! You will also notice I put the S&P 500 ETF sector allocation to the side. It's purposely on its own island as the key contrast is between the other two, but as I have written many times in this space, the S&P 500 is heavily influenced by the Nasdaq these days. So it is worth reviewing here.
The next group are what I call “dividend-friendly” sectors, meaning that as a group they have some appeal to investors, but their collective yield is probably too low to fund most retirement lifestyles. There are certainly some stocks in these 3 sectors that yield the 3-6% that dividend investors like me tend to focus on for retirement income, but there is more picking through the weeds when researching here, versus the 3 sectors shown above them. The high dividend yield ETF is 30% allocated to these sectors, while the Nasdaq 100’s allocation is only 10%. If you are keeping score, that means that the six more likely spots to find yield are 79% of SPHD and 10% of QQQ. That makes sense. What does not make sense is expecting these 2 market segments to move together all the time.
">YCharts 2017Most charts of short-term market events are rubbish. But the one above is worth showing you, because I think it is a microcosm of a few important, bottom-line issues that make the current market environment a very tenuous one for investors who do not take a risk-averse core approach.
The chart compares the paths of the QQQ (Nasdaq 100 ETF) and SPHD (an ETF which tracks higher-yielding stocks within the S&P 500 Index which have exhibited low volatility relative to their peers in that index. I am NOT recommending any particular security here, but merely using these ETFs to represent different segments of the equity market. This only covers a month, so why do I think it tells us anything? It is because it shows us, in broad daylight, that there are two market segments (high yield stocks and big stocks listed on the Nasdaq) which are sometimes in sync, other times at odds with each other, but for the past couple of years have been like oil and water – they don’t mix with each other. They represent a sort of Civil War in the stock market that keeps repeating itself. And while the past month was just a month in our lifetimes, the chart you see above has been cycling back and forth for many months, with the Nasdaq 100 getting the upper hand in a record-setting way. Its outperformance of high yield stocks is a historically-wide gap, and so-called “reversion to the mean” will at some point occur.
Adobe StockFocus your eyes on the far left and far right of the chart, and in each case, you will see that these two market slices moved in entirely opposite directions. Bottom line: the “market” is not a unified collection of stocks, no more than the U.S. Congress is a group of 535 people that all act the same way. The question is why does this happen? A look at the sector allocation of these two ETFs goes a long way toward answering that question. Here it is:
YCharts 2017, as of Sept. 25, 2017I divided the 11 main stock sectors into 4 groupings. The first are the ones that contain businesses for whom their dividend payment and yield is a significant part of their attraction to investors. REITs, Utilities and Energy stocks make up the group, and you can see that they represent about half of the assets in in the High Yield ETF. How much of the Nasdaq 100 is in these higher-yielding sectors? Zippo! You will also notice I put the S&P 500 ETF sector allocation to the side. It's purposely on its own island as the key contrast is between the other two, but as I have written many times in this space, the S&P 500 is heavily influenced by the Nasdaq these days. So it is worth reviewing here.
The next group are what I call “dividend-friendly” sectors, meaning that as a group they have some appeal to investors, but their collective yield is probably too low to fund most retirement lifestyles. There are certainly some stocks in these 3 sectors that yield the 3-6% that dividend investors like me tend to focus on for retirement income, but there is more picking through the weeds when researching here, versus the 3 sectors shown above them. The high dividend yield ETF is 30% allocated to these sectors, while the Nasdaq 100’s allocation is only 10%. If you are keeping score, that means that the six more likely spots to find yield are 79% of SPHD and 10% of QQQ. That makes sense. What does not make sense is expecting these 2 market segments to move together all the time.
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