Messages from a defiant Wall Street

The New York Stock Exchange, where the trading floor has been closed. Picture: AFP

The current rally on Wall Street has defied the bear market predictions and value analysts are finding the going tough, with one-third of S&P 500 companies declining to provide profit guidance. That makes it hard to calculate value.

And in Australia, as the government announced a relaxation of restrictions, the Reserve Bank slashed its forecasts for 2021 growth from six to four per cent. Myself and many others have been warning the RBA that it was too optimistic. They listened.

On Wall Street three discernible investment themes are blossoming--- buying two of the most depressed industries, energy and airlines; buying technology funds and going for the winners of the recent past.

CNBC reports that shares outstanding in the S&P 500 Energy ETF have increased 45 per cent since the beginning of April as investors backed US oil.

While Warren Buffett was selling his airline stocks the US punters were subscribing to an ETF that does the reverse. The US Global JETS ETF concentrates on American airlines and subscriptions have boosted shares outstanding from 1.5 million at the end of March to more than 40 million shares.

In Australia, Virgin has collapsed so people wanting to punt on airlines have only one choice - Qantas.

Our energy sector is not as speculative as US shale oil, but it has been hit hard.

The US blue chips of the 1950s were the big retailers and manufacturers---two of the segments most savaged in the current era.

On the blue chip list retailers and manufacturers have been replaced by Amazon, Alphabet (Google), Apple, Facebook and Microsoft. Americans are buying funds that have a big proportion of their money in these stocks. We do not have the equivalent on the Australian lists, apart from CSL, which has become our largest company.

There is also strong support for the speculative technology hopefuls that one day might join the technology elites.

In most uncertain times there is a rush for gold and 2020 is no exception. Shares outstanding in the largest ETF that holds gold directly are at their highest level since 2013. Fascinatingly jewellery demand in China and India is down.

Around the world, in uncertain times, there is a swing of money back home. That’s certainly the case in the US where there have been large outflows from funds that invest in Europe and Asia.

In Australia, dividend pain is well under way, with the big-yielding banks suspending or reducing payouts.

Like Australia a significant segment of Wall Street investors view a dividend as a critical component of stock ownership. So far many US companies have been reluctant to reduce dividends.

But the market has moved ahead and in the past two months declines in many yield stocks have ranged between 30 and to 50 per cent.

Even with the rally, stocks that previously had dividend yields of between two and three per cent are now yielding between 4 and 6 per cent as the market recognises that their dividends are unsustainable, given much lower cash flows.

This week, Dow Jones released its annual report on how actively-managed funds performed against their benchmarks. The conclusion is that active managers continue to show dismal performance against their passive benchmarks. For the ninth consecutive year, the majority (64.49 per cent) of large-cap funds lagged the S&P 500 last year.

After 10 years, 85 per cent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 per cent are trailing the index.

Those who invest on the index are winning, which is a damming indictment of the way the big highly-paid fund managers are undertaking their stock evaluations.