| Wednesday's Headlines 1. U.S. markets rebound as tech stocks lead 2. UK Prime Minister clears Brexit vote - January 31 or bust! 3. Boeing CEO wants to restart production sooner 4. What scares money managers in 2020 5. What would the S&P 500 have returned without the top 5 in 2019? Markets Closed
 Markets Today Global markets rebounded today as buyers returned, sending the S&P 500 and the Nasdaq to new record highs. The DJIA gave up early gains to close slightly in the red. Tech led today's parade as semiconductor stocks and IBM found investors' favor. Concerns about the spread of the new coronavirus did not impact markets today despite the rising number of fatalities linked to the outbreak. At latest count the illness has killed 17 people and sickened hundreds, according to global health authorities. Chinese broadcaster CCTV reported that travel in and out of Wuhan, where the coronavirus is said to have originated, has been halted. The World Health Organization has yet to label the virus a 'public health emergency of international concern', a designation used for complex epidemics that can cross borders. The United Nations agency said it would meet again Thursday to determine a strategy.
Headlines:
 What are Fund Managers Worried About? Money managers are worriers. They should be since they are allocating our capital, and their livelihoods depend on them making the right decisions with it. They spend a lot of time reading research reports, talking to companies, consuming the news, and formulating decisions about where and where not to invest.
According to Bank of America's Global Fund Manager Survey, they spent the better part of the last decade fretting about Eurozone debt, the growth of China, rising populism, trade wars, and quantitative tightening (worrying that central banks would stop buying treasuries and other fixed income securities that have guaranteed ample liquidity in the financial markets). Since the beginning of 2020, though, their concerns have shifted towards the 2020 U.S. presidential election.
While the election is 10 months away, fund managers consider the election to represent the biggest tail risk to performance. According to our definition, a tail risk is an event that has a small probability of occurring, but causes an asset to move more than three standard deviations from the mean. In other words, there is a small chance that the election could have a very big impact on the performance of their portfolios.
The conventional thinking is that if a Democrat were to be elected, even a moderate like Senator Joe Biden who is currently leading in Democratic primary polls by a slim margin, the tax cuts of 2017 would be abolished, there would be less military spending, and big technology companies like Apple, Amazon, Google, and Facebook would be targeted for break up.
While the election is their biggest tail risk, most fund managers, according to the survey, are still bullish on the stock market, especially big tech, even though they think it is the most 'crowded trade'.  Where Would the Stock Market be Without Big Tech One of our smart readers (we have thousands!) recently wrote in asking about the influence of big tech on the overall market. Specifically, he wanted to know how the S&P 500 would have performed in 2019 without the returns of the 5 best performers.
I turned to our friends at YCharts for the answer, and the results were not what I expected. I expected a dramatic difference in the returns without the top 5 stocks, which were mostly semiconductor stocks:
chart courtesy YCharts  Apple, Amazon, Facebook, Google (Alphabet), and Netflix, the FAANGs as they are known, get all the attention because of their size, their weight in indexes like the market-cap-weighted S&P 500, and their influence on our lives, but they weren't 2019's all stars in terms of performance. The stocks listed above were, but don't have the kind of weight in terms of their market caps to really influence the performance of the S&P 500. If you took them out of the S&P 500 last year, it would only have cut the S&P 500's gains by 0.43%. chart courtesy YCharts  If you removed the top 5 and the bottom 5 performers, the difference is only 0.06% to the downside. Fascinating.
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(chart courtesy YCHARTS)  Medical firm Exact Sciences rose today after a rival firm's colon-cancer screening method produced disappointing results. Student loan servicing firm Navient rose after it reported better-than-expected earnings.  Energy company Antero Resources continued to fall on low natural gas prices. Utility PG&E fell as it may need to pay out more to victims of wildfires than initially thought. Word of the Day Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution. Tail risks include events that have a small probability of occurring, and occur at both ends of a normal distribution curve. Today in History January 22, 1993 Today in 1993, State Street Global Advisors launched the first U.S.-listed exchange traded fund or "ETF", the SPDR S&P 500 ETF Trust, often known by its ticker, "SPY". ETFs are a type of mutual fund that can be traded every day like a stock. SPY tracks the S&P 500, an index of 505 large-cap U.S. stocks that account for about 80% of the value of the U.S. stock market. SPY is now the oldest and largest ETF in the world with over $300 billion dollars in assets under management. In the U.S. alone, ETFs now hold over $4 trillion dollars in assets under management.
Check out our interview with the founder of SPY above.
Source: https://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp
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Wednesday, January 22, 2020
Tail Risk
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