US Stocks: On shaky foundations? 

At the beginning of this week, stocks closed at a record high for the 12th consecutive session, an anomaly that’s only happened once before in 1987. It’s not just US equities that seem to be celebrating MSCI & FT World Indices also hit all-time highs last week.

The gains (and jubilant mood among investors) have been attributed to Donald Trump’s first few weeks in office, along with improving economic data around the world but while the headline figures seem to show that the stock market is in rude health (and the VIX is at record lows, these positive headlines are discussing what analysts at SocGen have labeled as an “underbelly of trouble”.

80 Percent Of Stocks Have A Lifetime Return Of Zero

40% Of US Stocks Are Loss Making

In a research note published last week, SocGen analysts lead by Andrew Lapthorne, point out that if you scratch below the surface of the record-breaking headline numbers, all is not as it seems.

For example, out of the 1,650 MSCI World Stocks, only 246 have hit a new all-time high this year, despite what the index’s headline gains may suggest.

Further, the average stock is still 26% below their all-time highs or down 20% when measured on a median basis. The majority of index performance since Trump took office has come from heavily weighted stocks such as Apple, Amazon, Facebook and large US financials. Gains from these heavyweights are camphorating a large number of index laggards.

Investment Concentration Is Super Dangerous: JPMorgan

For the long-suffering value investor, this must be good news right? The market isn’t as overvalued as it first appears. That’s not quite true. While more than a quarter of stocks are still trading below all-times highs, with scope for a rebound, median (unweighted) valuations are also near all-time highs, so valuations have already shifted higher.

And there’s another even more troubling issue to consider.

Klarman: ETFs Are Dangerous But Should Help Value Investors …

Of the 15,000 stocks in SocGen’s developed market listed equities bucket, on average more than 30% are loss making. The US has the highest proportion of these companies with 40% of the listed US firm’s considered by SocGen still currently loss making. In Europe and the rest of global developed markets, the figure is lower but still alarming at 30%. As Lapthorne notes, this is something you won’t be aware of “if you rely solely on the record-breaking S&P 500 and MSCI World Indices.