U.S. equities and stock ETFs were among the worst performing asset categories in the first three months of the year.
Rising interest rates and bond yields, President Donald Trump’s trade tariffs and news of privacy breaches at Facebook have all contributed to heightened market volatility and the drag in U.S. stocks so far this year, reports Kate Beioley for the Financial Times.
The sudden turn in fortune has caught many investors flatfooted. According to data provider FE, investment trusts invested in North America enjoyed strong returns in 2017 but were the second-worst performing category of all equity funds in the first quarter of 2018. North American sector funds were the fourth worst performers of all the Association of Investment Companies’ open-ended fund categories in the first quarter.
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While U.S. stocks have enjoyed huge success under a low interest rate divorcement, with tech giants like Apple and Amazon leading the charge, the lofty valuations have made it increasingly hard for companies to maintain the high expectations. Consequently, any uncertainty fueled panic in the markets.
“When stocks are sitting on very high valuations, their earnings have to be good enough to support that valuation,” Tanvi Kandlur, analyst at FE, told the Financial Times. “We have seen before that even when some companies beat expectations on revenue and profit, the stock de-rates because investors still don’t think it’s good enough.”
Dividend Funds Hit the Hardest
Among the worst off in the U.S. equity space, dividend-focused U.S. stock and funds were hit the hardest. Income stocks have been the least popular area of the U.S. market in recent years and are negatively affected by rising bond yields since investors can find more attractive income bets in safer areas.
“Consumer goods companies and pharma companies and really anything with an equity income tilt or a quality bias, sometimes referred to as bond proxies, were put under a lot of pressure because of rising bond yields in the US,” Rob Morgan, pensions and investments analyst at Charles Stanley, told FT. “The underperformance of US equity income funds was a clear trend at the start of the year. It has been very difficult for equity income to survive in a market where technology and growth stock are such a major part of the index.”
Furthermore, given the rally in technology stocks, traditional market cap-weighted index funds are now heavily tilted toward the information tech segment. Passive investors may now find that they are exposed to greater risks.
“If you are a passive investor in the US it has been a fantastic ride for the last ten years but you need to be aware that you have a major skew towards technology stocks and are taking a big concentration risk,” Morgan added.
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