Volatility in the market is driving a stock-picking comeback.
The stock market’s sharp moves up and down over the past 18 months have caught the attention of some individual investors who believe the market has reached a point where picking the right stocks matters more than throwing money into index-tracking funds.
Wall Street analysts say a combination of factors are reviving investors’ interest in single-stock ownership again. That includes a “buy-the-dip” mentality that set in following one of the equity market’s worst quarters in years, as well as an accommodative Federal Reserve, a solid economic backdrop and greater price dispersion in stocks than in years past, analysts say.
The recent flare-up in U.S.-China trade tensions has the potential of making stocks trade more independently of each other, giving investors more opportunities to buy shares, analysts say. But trade turmoil, along with other geopolitical issues simmering in the background such as Brexit, could lead to an extended period of pressure on stocks throughout the market, especially if investors think the tariffs already levied will compress corporate profits and consumer spending.
How that all plays out has yet to be determined. The S&P 500 (.SPX) remains up 13% for the year, but it has fallen over the past three weeks, shedding just over 4% so far in May as trade tensions re-emerged. Analysts aren’t expecting much progress, at least until President Trump and Chinese President Xi Jinping meet at a Group of 20 summit in Japan next month.
That hasn’t deterred Matthew Strelsky, who is 26 years old and not a professional trader. The former retail employee bought shares of Qualcomm Inc.(QCOM) earlier this year, enjoying a gain in late April after the chip maker settled its legal disputes with Apple Inc. (AAPL), only to see those shares fall precipitously a month later.
“I’m looking at it so much into the long run,” says Mr. Strelsky, who lives in Monmouth County, N.J. He kept his shares during Qualcomm’s 23% slide this month as a federal judge ruled the company violated antitrust law. Mr. Strelsky says he plans to add more in the coming days. “You have to see the potential in these companies,” he says.
Analysts say there is little data tracking broad investor moves in and out of stocks that is comparable to how the industry tracks fund flows. Bank of America Corp. (BAC) , however, says the stock-picking revival is playing out within its $2.8 trillion wealth-management arm. Bank of America clients have spent roughly $15 billion on buying individual stocks so far this year, on top of $22.3 billion last year, according to data from the bank.
Before 2018, the bank’s clients had pulled tens of billions of dollars annually from single stocks since 2008.
Clients of brokerage firm E*Trade Financial Corp. (ETFC) have been net buyers of stocks in communications services, technology and energy this year. At TD Ameritrade Inc. (AMTD), clients in January and March mostly bought stocks including Tesla Inc. (TSLA) and Kraft Heinz Co. (KHC) , but they sold in February and April.
Stocks last year were mostly in lockstep, rising and falling over the latest determinations on how high interest rates were headed or whether economic growth was flagging rather than based on individual performance, said Savita Subramanian, equity and quantitative strategist at Bank of America.
That, along with equities appearing reasonably cheap following a recent pullback, helped individual stocks move more independently compared with the first three months of the year, said Ms. Subramanian.
“You used to make more money being in the right sectors than the right stocks generally,” Ms. Subramanian said. “Now you’re making more being long one stock or short another.”
Colin Santucci, who is 35 and manages a food brokerage in Philadelphia, bought shares of Boeing Co. (BA) and other stocks in the wake of the late-December selloff. After political pressure and the prospect of tighter regulation sent health-care stocks lower earlier this year, Mr. Santucci said he “added a ton” of UnitedHealth Group Inc. (UNH)
“I can ride out the bumps,” he says. “I’m fairly bullish because we’re going into an election year and interest rates aren’t going up. Trade isn’t a reason to be bearish.”
But even with the increased interest in individual stocks, passive-asset managers still dominate the investing landscape. That is unlikely to change as index funds that track the S&P 500 and other benchmarks consistently beat professional fund managers who seek to outperform the market. Over the past four years, $855 billion has been pulled out of active funds, while $2 trillion has flowed into passive funds, according to data provider Morningstar.
Picking winners isn’t easy. Warren Buffett’s Berkshire Hathaway Inc. (BRK/B) has underperformed the S&P 500 for a decade. He has encouraged mom-and-pop investors to put their money in index funds rather than choosing individual stocks. More than half of actively managed large-cap mutual funds remain behind their benchmarks this year, according to Goldman Sachs (GS), while the average hedge fund has returned just 8%.
“The average manager has done better, but they haven’t done well,” said Mark Stoeckle, chief executive of fund manager Adams Funds.
Part of the shift to single stocks at Bank of America is thanks to its thundering herd of Merrill Lynch financial advisers, who have increased clients’ allocations for single stocks to 40% this year from 37% in 2018, while positions in mutual funds and exchange-traded funds fell. The majority of advisers say they were bullish on U.S. stocks, expecting asset prices to hit new highs this year, according to a bank survey.
Goldman Sachs has been encouraging clients to pick more stocks, saying earlier this year that investors should be focusing on shares that appear to be moving more independently of the broader market, including Twitter Inc. (TWTR), Ulta Beauty Inc. (ULTA) and Monster Beverage Corp. (MNST). All three of those stocks have outperformed the S&P 500 this year, rising at least 29%.
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