So far, 2017 S&P 500 performance has been relatively strong. Through April, the S&P 500 returned 7.16%. An interesting dynamic of this performance has been the re-emergence of Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL), or taken as an acronym, the “FANG” stocks. This market reflection will concentrate on the performance of the “FANGs” and other stocks that have driven market performance this year, and what that means for GI portfolios.

For a bit of history, the “FANG” acronym began to catch on in 2015. The FANGs were singled out as a result of:

• the growth-oriented nature of these companies
• their significant outperformance compared to the market

The chart below illustrates the “FANG” stocks significant outperformance versus the S&P 500 during 2015 (green), their underperformance in 2016 (blue) and their re-emergence in 2017 (yellow):

As a result of their size, the “FANG” stocks can have a large effect on the performance of the S&P 500. This is because the S&P 500 is a market-capitalization weighted index, which simply means that larger companies carry more weight and have a more significant effect on the performance of that index. In aggregate, the “FANG” stocks represent over $1.6 trillion in total market-capitalization. As an example, if the S&P 500 were an equally weighted index, the “FANG” stocks would be 0.8% of the total weight of the index (4/500 = 0.8%). However, because the S&P 500 is a market-capitalization weighted index, the “FANG” stocks represent a combined 6.5% of the total weight of the S&P 500.

In addition to the “FANG” stocks, there are other large cap stocks that have had a significant effect on year to date market performance. The data below shows the top 15 contributors to the S&P 500 performance year to date. The performance contribution from the top 15 stocks has been 3.36% in total, which represents 47% of the 7.16% year to date performance of the S&P 500.

How do the FANG stocks differ from Gradient 50 (G50) positions? The answer is DIVIDENDS. The G50 would not be invested in “FANG” stocks, as none of those companies pay dividends. As a reminder, the G50 portfolio invests in high-quality, blue chip companies that pay attractive dividends.

From the list above, only 5 stocks meet the G50 investment criteria of a high quality company with a superior dividend yield (highlighted in green). The G50 currently owns 3 of those 5 (in bold). Apple (AAPL) was also owned in the G50, but was sold in late January as the stock’s dividend yield fell below our hurdles. Therefore, in times when non-dividend paying stocks are driving the performance of the S&P 500, we understand that G50 performance may differ from the overall market.

Our team believes in the long term value that the G50 and high-quality, dividend paying stocks provide for growth and income investors. We have a strict investment process when selecting investments in the G50. While we certainly don’t discount the merit of owning growth companies like the “FANG” stocks for certain investors, we believe that these investments are suitable for a different type of portfolio, such as our growth oriented Gradient 33 (G33).

For the G50, as with all GI portfolios, we believe that adhering to our specified investment process is the best way to create a portfolio strategy that balances individual investor risk and return objectives.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Those are always comforting words when flying. The pilot will usually follow up with a comment about turning off the seatbelt light and telling passengers they are free to move about the cabin. There is usually a safety recommendation to keep the seatbelt fastened while seated. In the stock and bond markets it feels like we have reached our cruising altitude, but we advise that you keep your seatbelts fastened in case we hit some unexpected turbulence.

In April, the stock market leveled off at a comfortable altitude. A French preliminary election and a new round of quarterly corporate earnings brought us back to the 21,000 level on the Dow Jones Industrial Average. All the noise regarding Syria, North Korea, trade wars, walls, immigration, tax cuts, Obamacare, and shutting down the federal government can be a distraction to what really matters: corporate earnings. Thankfully, the market has not lost its focus. Strong earnings from McDonald’s, Alcoa, Caterpillar, and DuPont were welcome news and signaled that another quarter of solid earnings is on the way. The technology sector fueled the Nasdaq Composite to breach the 6,000 milestone with Facebook, Netflix and Google (now Alphabet) reaching records highs. International stocks are back in play as the news from France ignited a rally overseas. At the end of the month, it was the international developed stock group taking home the first place trophy with a return of 2.54% followed closely by the NASDAQ Composite and emerging market stocks with monthly returns of 2.35% and 2.19%, respectively.

Since our elections last fall, the market has moved steadily higher with volatility nearing record lows. This is not uncommon as a smooth ride keeps investors comfortable. This feeling of calm will not last forever, but take the time to enjoy it. Graphically, this 10-year chart of volatility speaks volumes about the underlying positive tone in the market:

The bond market continues to befuddle experts as interest rates appear to have a mind of their own. The 10-year U.S. Treasury Note traded in a range of 2.4% to 2.2% during April and finished the month yielding 2.3%. There are some interesting dynamics at work in both the U.S. and international bonds markets. Interest rates throughout the developed world are low and continue to remain low. In the U.S., we tend to compare the yield of the 10-year U.S. Treasury Note to where it’s been over the past 10-15 years, and we can accurately state that our interest rates are low. When you take the next step and compare our 2.3% yield on 10-year to Germany at 0.3% or France at 0.8% or Japan at 0.0%, you begin to realize our interest rates are quite attractive in a global sense. While the consensus is for higher interest rates in the U.S., getting there will be slowed by global factors destined to keep interest rates low.

Stay positive with your investment program and enjoy the ride. Asset prices will correct at some point in the future, but for the present time we are in a sweet spot of positive corporate earnings, low interest rates and low volatility.

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222