Trying to Salvage a Ruined Year in Stocks With Seven Weeks to Go
(Bloomberg) -- Fund managers who pick stocks for a living just watched a good year turn sour. That may not be such a bad thing for everyone else.
It’s an old theory, but one with a basis in improbable pieces of data: the S&P 500’s record of rallying in the fourth quarter, which has happened 25 times in 30 years. Even crazier is the index’s propensity to rise after a midterm election. In 18 instances since 1946, it’s always gone up.
Fun-with-statistics? Maybe. But some see a logical pattern, one in which active managers who have struggled for 10 months dash into aggressive bets as the clock winds down. As investors bask in what passes for calm after the worst month in seven years, bulls are hoping for a repeat.
“In the last two months of the year, all institutional investors become short-term investors,” said Matt Maley, equity strategist at Miller Tabak & Co. “They have to be in the groups that are moving.”
Characterizing trends in equities is tough right now. The Nasdaq 100 just had a two-day drop that would’ve ranked with the worst of 2017, though framed against the prevailing turmoil can be viewed as a blip in a two-week rally. October was the worst month since 2011, but two gains in the Nasdaq 100 over the last 10 days exceeded 3 percent. That also hasn’t happened since 2011.
Whatever the case, it’s been a trial for fund managers. Coming off a banner month in September, with 68 percent beating benchmarks, large-cap active managers took it on the chin over the next five weeks. When the dust cleared, only 39 percent were ahead of their index, compared with 55 percent at this time last year, Bank of America data show.
At the same time, the sell-off tempered valuations, with the S&P 500’s 12-month forward price-to-earnings sliding to the lowest since 2016. That’s given money managers like Scott Colyer, chief executive officer at Advisors Asset Management, a reason to step in.
“I don’t think I would be backing away here -- I would be backing up the truck,” said Colyer, who’s been buying consumer discretionary, materials, industrials and energy stocks while adding to his tech position. “It’s a pretty good entry point here. We’ve corrected for the exuberance that we had in places like tech, but all we are seeing is moderation, not some kind of capitulation.”
There’s evidence hedge funds are in on it too. Technology and consumer stocks may have led the sell-off last month, but rather than bail, hedge funds ramped up exposure, buying those two groups more than any other in the last five days of October, Goldman Sachs data show.
Research from JPMorgan also suggests hedge funds have built up their broad equity positions from low levels. They’re under pressure as Nov. 15 approaches, the deadline for many investors to put managers on notice to withdraw money. It’s notable that more than $10 billion was pulled from hedge funds before they even gave up all their gains for the year.
If history is any guide, they should have some help from seasonality. Since 1988, the S&P 500 has closed higher in the fourth quarter more than 80 percent of the time, returning nearly 5 percent on average. Add in an election year and calculate from the October low, and that gain more than doubles, according to LPL Research. From the bottom on Oct. 29 this year, we’re already about halfway there, the S&P 500 up 5.3 percent since.
“Every talking head under the sun has been talking about the next three quarters after the midterms,” said Eric Aanes, president of Titus Wealth Management in California, which manages $581 million. “It’s a self-fulfilling prophecy.”
©2018 Bloomberg L.P.