Boring is Good

Even when accounting for down days like yesterday the US stock market, as measured by the S&P 500, has been trading in a narrow sideways range since October when major AI trends started to shift. The resulting volatility has left the S&P up about three quarters of a percent this year. While a flat return like that implies a calm market, there’s a lot going on beneath the surface.

Previously “hot” sectors like Tech and Communication Services have flipped and the performance of individual industries is all over the place. Over 100 of the 500 stocks in the index are up or down over 20% so far this year. Software stocks like Salesforce, Docusign, and cloud-based data providers in my industry are down around 30% this year on fears that AI will disrupt their fundamental value propositions and competitive advantages. Still, another 100 or so of the S&P’s holdings (and some of the largest) are up or down less than 5%. That has smoothed out a lot of volatility over the last few months. At its high point for the year, the S&P was up about 2% before falling to a low of about 0.7%. According to my research partners at Bespoke Investment Group, such a tight range between the benchmark index’s year-to-date high and low point has only happened one other time since 1945.

This averaging of volatile and less volatile US stocks, and other rotations in the market, has helped diversified investors. Smaller company stocks have been outperforming their larger brethren compared to recent history, as have value and dividend stocks. Being invested internationally has also helped. Foreign markets from Europe to Asia are outperforming again so far this year, with the typical indexes for both returning about 8% and 11%, respectively. Add in a percent or so of performance from bonds and we have a market consolidation/rotation that’s been pretty tame for most investors.

That said, various analysts wonder how long this phase might last. Fears about how disruptive AI might be to certain industries (and how fast that might happen) could be overblown and investor reaction could be equally so. Companies in more defensive sectors like Consumer Staples have been doing well of late but are still facing tariff headwinds. Those issues may or may not have been made more complicated by the US Supreme Court’s decision relating to tariffs and the Trump Administration’s reaction to it. And the consumer, at least on average, is still managing well in the economy and seems to be taking recent inflation in stride. Ultimately, analysts expect the US economy to pick up steam again and sectors that have been outperforming lately could be rotated back to their normal place in line.

This all accentuates the importance of taking a long-term view with our diversified investments. That’s nothing new but it’s a helpful reminder from time to time, or often, repeated like a mantra. These days it’s so easy to slip down rabbit holes while chasing performance or whatever the current trend is. We can find headlines to fit any narrative and fear and speculation in their various forms are always for sale.

For example, the Wall Street Journal reports a massive increase last year in the launch of actively managed exchange traded funds. ETFs were originally built as an interesting way to do something boring, but the category has expanded dramatically in recent years. The first major change to ETFs was using leverage to offer 2x or 3x the upside of an index or downside protection and were meant to be used as daily trading vehicles. That latter point continues to confuse investors who end up holding these things far too long. But now in addition to index funds that match the S&P 500, for example, you can buy ETFs where the manager owns a single stock and trade options on it to juice up returns. And demand for this is strong, or at least fund managers think so. The Journal says that of the nearly 400 single stock ETFs currently available, more than half were launched just last year.

Frankly, my initial response was shock that so many single stock ETFs exist, but I realize that’s naïve. Some investors are perpetually looking for an angle and much of the industry exists to sell them whatever they want. And when they don’t know what that is, the industry will tell them. Most of these funds seem like a good way to pay asset managers high fees for the opportunity to lose money. For example, the ProShares Ultra Silver ETF charges about 1% per year (which is on the cheap side for funds like these) and lost 60% in a day when the price of silver crashed a few weeks ago. I hope not too many investors were caught up in this, but the fund still has around a billion in assets and trades around eight million times a day, so interest remains.

In summary, the world and the markets are already exciting enough; let’s keep long-term investing boring.

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