CIG Asset Management Update January 2020: How Much to Dance?

To quote Citigroup’s former chief executive, Charles “Chuck” Prince, in July 2007, “As long as the music is playing, you’ve got to get up and dance,” adding, “We’re still dancing.”⁽¹⁾ Chuck Prince’s comment pointed out Citigroup’s race to keep up with other banks who kept loosening lending standards and Citi could not afford to be the one lemming who dropped out even as the subprime crisis was worsening. We know how it ended for Citigroup, subprime lending and debt-funded private equity deals.

Below is what the fear of missing out (FOMO) looks like today. In early February 2020, Tesla took off like a rocket to $968 per share, a +66% increase in four trading days. One day later, the stock dropped to $704, a -27% decline⁽²⁾. At the same time, Tesla’s trading volume soared to over three times its average⁽²⁾. We have not seen this kind of speculative trading in large cap stocks since the dot com boom in 1999 – 2000.

With such extreme activity in the market, the -0.04% that the S&P 500⁽²⁾ posted in January is surprising placid – until you look under the hood. In a more modest bid to quell their FOMO, investors show no waning love for chasing the four largest stocks in the S&P 500, which are up an average of +15% year to date as of February 19, 2020⁽³). These four out of 500 companies, Microsoft, Apple, Alphabet and Amazon, are 16.4% of the S&P 500 index and have contributed 2.5% of the index’s 4.9% return, or 50%⁽³⁾. Of course, from a Factor/ strategy perspective in January, Growth and Momentum stocks decimated Value stocks by over 13%, the widest margin in a month since 2000 when this data set started⁽³⁾. However, this euphoria could be quite fragile as the top-performing sector was Utilities, up 6.65%⁽²⁾.

So far in February, the Dow Jones Industrial Average, S&P 500, and NASDAQ indices are making new all-time highs. Although not to the same magnitude as Tesla, these indices show similar up gaps. It was especially pronounced during the four days in a row post-January 31^s’s sell off⁽¹⁾ as shown below for the NASDAQ Index.

Meanwhile, the worsening of the coronavirus appears to have caused a plunge in bond yields in January as investors seek additional safe havens and the VIX Index⁽²⁾(the CBOE Volatility Index® which measures U.S. equity market volatility) has also risen.

Consequently, we have acted in client portfolios to adjust to our perception of the ongoing exaggeration of the market environment that we talked about above and in the recent year-end letter (we highly encourage you to read it if you have not done so already.) Given these risks in the market, we continue to proceed with caution and feel that portfolio discipline remains paramount. While recessionary concerns remain low given the massive central bank stimulus around the globe, CIG’s outlook can rapidly adjust as a result of a material change in economic indicators or a dramatic shift in central bank policy. Accordingly, we ask ourselves, “How and how much do we want to dance with this market today?”

CIG Asset Management Update January 2020: How Much to Dance?

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