- Jim Young/Reuters
Stocks finished higher on the first day of May with the Dow gaining triple-digits.
Many investors will be familiar with the cliche of “sell in May and go away,” though as Akin Oyedele noted over the weekend, this is kind of silly.
First, the scoreboard:
Dow: 17,891.2, +117.5, (+0.7%) S&P 500: 2,081.4, +16.1, (+0.8%) Nasdaq: 4,817.6, +42.2, (+0.9%) WTI crude oil: $44.90, -2.2%
It’s a busy week for the US economy and things got kicked off with a couple reports out of the manufacturing sector which showed things got better in April.
The Institute for Supply Management’s latest PMI came in at 50.8, indicating expansion in the US manufacturing sector but at a slower pace than in March. This report’s prices paid sub-index, however, was a complete blowout, rising to 59.0 in response to higher commodities prices.
Commentary in this report indicated that the auto industry is still going strong while things are still “sluggish overall” but showing some signs of picking up.
Markit Economics’ final PMI reading for April hit 50.8, in-line with the report’s preliminary reading earlier this month, though Markit’s Chris Williamson was a bit more downbeat on how things look in the US manufacturing sector.
“The April PMI data suggest there’s no end in sight to the current downturn in manufacturing activity,” Williamson said in a release.
Elsewhere in the economy, Bob Bryan noted that the calls from big names on Wall Street for fiscal stimulus out of Washington are getting louder. However, the current state of the US government doesn’t at all suggest we’re getting closer to the kinds of big investment folks like Carl Icahn and Larry Fink have hinted at in recent months.
The federal budget has, however, stopped being a drag on GDP and the market has noticed: stocks that benefit from a government tailwind have outperformed over the last several months.
Mohamed El-Erian had bad news for investors on Monday.
Speaking at the Milken Conference in Los Angeles, El-Erian said, “The growth model for the advanced world is getting exhausted, and for emerging markets it’s getting contaminated.”
El-Erian, we’d note, is the recent author of “The Only Game In Town,” which says that central bank policies are only going to go so far to fix the global economy.
Not unlike the aforementioned Wall Street bigwigs calling for more government spending to boost the economy, El-Erian’s argument is a bit less prescriptive but does make clear our current path is not going to be one that leads to prosperity. Bummer!
Linette Lopez, who was in the room for El-Erian’s presentation on Monday, noted that after he told attendees that the road we’re going down with the global economy ends it will “stop right there,” nervous laughter followed.
It was a mixed day for municipal finance.
Atlantic City made a $1.8 million bond payment to avoid default.
Puerto Rico, in contrast, said Sunday it would not make a $422 million bond payment due Monday, thus defaulting on debt owed by its Government Development Bank.
And look, I am by no means an expert on the municipal bond market. Hardly even a tourist! For more on the state of municipal finance in the US you should read Kristi Culpepper on Medium or Joe Mysak at Bloomberg.
Speaking of defaults, the high-yield default rate for the energy sector has been pushed up to 13%, topping the 9.7% high seen back in 1999, according to Fitch Ratings. The bankruptcy filing from Ultra Petroleum and Midstate Petroleum over the weekend added $3.1 billion to high-yield energy default volume this year.
Fitch expects the default rate in the high-yield energy space will hit 20% this year.
So, here’s an argument that passive investing makes markets more efficient and doesn’t really – at all – risk markets becoming a “socialist” construct in which we all just get a set return and no one can outperform.
I’m expecting people won’t love this one, mostly because people seem to really like the idea that low-cost, passively-managed index funds pose a clear and present danger to financial markets.
But the post, constructed from work done by the great finance blogger “Jesse Livermore” over the weekend, not only argues that there’s nothing to worry about with the rise of passive investing, rise but that this increase makes markets more efficient.
Much of the conversation in and around the investing world assumes that if you know some stuff you can find a stock or an investment that will, over time, beat the market. But the average return of active managers, Livermore illustrates, must – for a specific index of securities – equal the market average return. Include fees and your chances of beating the market are very, very slim.
The big event this weekend was the Berkshire Hathaway annual meeting. And while Warren Buffett is perhaps the most famous stock-picker in America, he spent nearly 15 minutes going on about how the only thing an individual investor should be doing with their money is putting it in a low-cost S&P 500 fund.
The fees, in Buffett’s view, will almost certainly make performance in actively-managed investments worse, but the bigger problem is in finding a manager than can outperform. Again and again.
If the argument holds up that more passive money creates more efficient markets because only the best managers are left running money, this would make Buffett’s argument even stronger.
Of course, as Buffett noted, no one selling investment advice wants to sell advice that says, “Just do this one, easy, cheap thing,” because, well, that doesn’t pay.