The S&P 500 is threatening to end the year not only on the upswing but also in the black for the past 12 months. So why exactly is this terrible news?
Well, it’s not for you and me. But it is for the many fund managers who are underperforming the market. Says one market observer: “”The worst thing that can happen for a fund manager is to underperform and be in the red when your benchmark, the S&P index, is in the green.”
It’s not going to be positive by much if it happens at all. So your stocks (unless you invest with my Global Wealth Insider) probably did you very little good in 2011.
So do you have any idea why this recent surge by the S&P is such bad news?
If you don’t, this is something you should keep in mind: Most fund managers don’t get paid for earning you a profit. Rather, they get their bonuses by outperforming their benchmark, which for many is the S&P 500.
It also doesn’t help them bring in new investment money if their benchmark, the S&P 500, shows a profit and they show a loss.
If you believe that a rising market floats all ships (it’s actually true of the most part), then you much believe the flip side: That a falling market crashes all boats (which is also often true).
It’s only when a market is flat like the S&P 500 has been over the past year, that a manager’s ability to pick exceptional stocks stands out (one way or the other). From the Associated Press…
Traders were relieved by news that Congress extended a payroll tax holiday for workers and emergency unemployment benefits. Both programs were set to expire at the end of the year. Letting that happen would have reduced economic growth by about 1 percent, analysts said.
The final business day before Christmas also was the slowest full day of trading so far this year. Traders exchanged just 2.22 billion shares, about half of the recent average. The market will be closed on Monday because Christmas falls on a Sunday this year.
Stocks have risen steadily since Tuesday on hopeful signs about the pace of economic growth in the fourth quarter, which ends next week. New claims for unemployment benefits fell last week to the lowest level since April 2008, long before anyone realized the nation was in a recession.
A series of mixed economic reports Friday did little to derail that optimism. The Standard & Poor’s 500 index added 11.33 points, or 0.9 percent, to 1,265.33. It started the year at 1,257.64.
Stocks might surge into the new year if the S&P 500 passes a couple of key technical thresholds, said Todd Salamone, research director at Schaeffer’s Investment Research.
Fund managers currently hold relatively few stocks, Salamone noted, and many of their funds have underperformed the market and are negative for the year. If the index rises farther above its break-even point for the year or its average over the past several months, fund managers might flood into the market in a last-ditch attempt to improve their annual returns, he said.
“The worst thing that can happen for a fund manager is to underperform and be in the red when your benchmark, the S&P index, is in the green” for the year, Salamone said.
The Dow Jones industrial average rose 124.35 points, or 1 percent, to 12,294. Bank of America Corp. was the Dow’s biggest gainer, adding 2.4 percent. All but two of the 30 Dow stocks rose, Alcoa Inc. and Boeing Co.
The Dow has risen 527.74 points, or 4.5 percent in the past four days. It was the first four-day winning streak for the Dow since mid-September.
The Nasdaq composite index gained 19.19 points, or 0.7 percent, to 2,618.64.
Flat markets in an underperforming fund are a manager’s worse nightmare. These guys are very unhappy about seeing 2011 in the rear-view mirror.
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