Market Forces 003

Market Summary

The introductory component of all the “Market Forces” pieces to date have started off with a brief recap of how key financial markets have performed. In this respect, little has changed in this, the third instalment of the series; the S&P 500 and NASDAQ remain down 8%, and 13% respectively since the beginning of the year.

The fact that these two indices are essentially unchanged over the past 5-6 weeks, belies the significant volatility we have seen in markets over this same period, not to mention the significant elevation in geopolitical risk with the Russian invasion of Ukraine.

After some attempt at a rally in early February, the market continued to give up ground, hitting lows on the 24th of February where, intraday, the S&P was down ~14% for the year, and the NASDAQ almost breaching 20% decline levels (falling ½ a percentage point short at down 19.5%).

Market indices, despite various complications in construction (differing weighting methodologies, rules around admissions/restriction, etc.), are in their simplest forms an aggregation of a number of individual stocks. With recent market indices being rangebound, we thought it worthwhile to take a closer look inside these indices, essentially de-aggregating, or separating this ‘bundle’ of stocks.

For the purposes of this exercise, we have focused on analyzing the S&P 500, though we would expect to see similar results if we used any other broad representative equity market index.

In particular, the focus of this analysis is to assess the breadth of the performance of the market over the past decade, or put more plainly, if the overall market index was up (or down), what proportion of the stocks comprising that index were up (or down).

The results are both robust and consistent with what one would expect from a common-sense approach and can be summarized as follows; the greater the performance of the overall index (in this case the S&P 500), the greater the proportion of the stocks underlying the index with positive returns.

This is a perfect example of the aphorism “A rising tide lifts all boats”, and if we look at the raw data, we can see that the two time periods where the index produced negative returns, calendar 2018 and year to date 2022, were the only instances where most of the underlying stocks failed to produce positive returns.

In light of the challenging markets experienced year to date, it is unsurprising that almost 3/4 of stocks in the index have failed to deliver a positive return; year to date ~70% of stocks have delivered a return between -25% and 0%. What is sometimes overlooked is that just as in favourable markets there are stocks that do not perform (i.e. deliver negative returns), in tougher markets, there are stocks that do. So far for 2022, almost ¼ of the stocks in the index have delivered positive returns in the 0-25% range.

Whilst more challenging, this highlights the potential for stock selection to add value, particularly in more difficult markets.

The McIver Capital Management process relies on disciplined asset allocation augmented with security selection. Our research and analysis efforts continuously focus on identifying individual securities which we believe will outperform the overall market. In more challenging environments, like the one we currently find ourselves in, we believe this security selection is a key feature of our process that adds meaningful value to client portfolios.

As a client, you may have noticed some of these high conviction individual stocks being added to your portfolio over recent weeks, and we aim to continuously add new names as our process uncovers additional attractive opportunities.

Sincerely,

McIver Capital Management
Paul, Katie, Neil, Warren, Matt, Mark

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