The George Costanza Market

Back in mid-December 2018 we published a list of the S&P 500’s 11 worst performing stocks for the year-to-date. We argued these names would have an especially volatile end to their year due to heavy tax loss selling, sparked by the market’s late Q4 swoon. Further, we posited that the magnitude of any early 2019 recovery for these stocks would provide some insight into the total impact tax selling had in December 2018. The bigger the January bounce, the more tax selling was an outsized factor in December’s decline. s

Here is that “2018’s biggest losers” list, and how they have performed year-to-date in 2019:

  • General Electric (GE): +20.3% YTD, even after today’s 7% decline
  • Mohawk Industries (MHK): +14.0%
  • Invesco (IVZ): +14.8%
  • Western Digital (WDC): +30.2%
  • L Brands (LB): +3.5%
  • Alcoa (AA): +6.3%
  • Unum (UNM): +23.5%
  • Brighthouse Financial (BHF): +27.3%
  • IPG Photonics (IPGP): +34.5%
  • Note: Newfield Exploration (NFX) was on this list, but was purchased by Encana last month. The price return from December 15 (when we published the original list) to the transaction’s close was +16.3%.

Three points on these results:

  • The average YTD return of these 10 names (excluding NFX): +17.4%.
  • This is well ahead of the 10.6% YTD return for the S&P.
  • Only two of the names have underperformed (AA and LB).

Readers will recognize this phenomenon as the “January effect”, but at least for 2019 it is more like the “January and February effect”. A look at the 8 winning names from the list above shows that all of them reached peak YTD returns in the second month of the New Year, not the first. We attribute that to the unusually large amount of tax loss selling in December 2018.

As we looked at the performance for 2018’s losers we got to wondering, “Which S&P 500 stocks are 2019’s biggest winners?” We arbitrarily cut off this list at a 40% YTD gain and also pulled the data for how they performed during just December 2018. Here is the data, starting with the best performing name and working our way lower:

  • Xerox (XRX): +56.1% YTD. December 2018’s return: -37.7%
  • Delphi Technology (DLPH): +52.2% YTD. December 2018’s return: -16.2%
  • HanesBrands (HBI): +45.8% YTD. December 2018’s return: -21.2%
  • Mattel (MAT): +45.8% YTD. December 2018’s return: -28.2%
  • Xilinx (XLNX): +42.5% YTD. December 2018’s return: -7.9%
  • Chipotle (CMG): +42.1% YTD. December 2018’s return: -8.8%
  • Hess (HES): +40.1%. December 2018’s return: -24.8%

And the averages/comparisons to the S&P 500:

  • Average for these 7 names: +40.6% YTD. Their average December 2018 price return: -20.7%.
  • For reference: S&P 500: +10.6% YTD, December 2018’s return: -9.2%

It’s easy enough to see the pattern here, which resembles the prior point: many of 2019’s biggest winners to-date are simply those names that got really clobbered in December 2018. That’s how you end up with Xerox as the S&P’s top stock for the year. This is a name that hasn’t gone anywhere for half a decade, after all.

In closing: we’re sorely tempted to call US equities the “George Costanza market”, after Jerry Seinfeld’s best friend whose instincts were always exactly wrong. The market’s panicky sell-off at year-end 2018 set up both a general bounce higher in 2019 but also created some remarkable opportunities in unexpected names. The question now: it is time to do the opposite again?

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