Diversify your portfolio into other parts of the world, says Invesco's Brian Levitt
Invesco's Brian Levitt and Morgan Stanley's Jim Caron, join 'The Exchange' to discuss the markets, Trump trade and economy.
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Yahoo
2 hours ago
- Yahoo
Commentary: Identifying winning stocks is hard. Holding winning stocks is a nightmare.
A version of this article first appeared on We've discussed exhaustively how difficult it is to pick stocks that outperform the market. But let's assume you were able to identify these winning stocks. Is it smooth sailing from there as you smoke the competition? No. Far from it. It turns out that the stocks offering the best returns for investors historically experienced incredibly painful max drawdowns (i.e. percentage declines from a price peak to a trough). Morgan Stanley's Michael Mauboussin and Dan Callahan recently studied the price behavior of 6,500 stocks. Among other things, they took a closer look at the 20 stocks with the best total shareholder returns over the 40-year period from 1985 to 2024. They also reviewed the performance of the 20 worst performers during the period. (Note: They only considered stocks listed on the NYSE, NASDAQ and NYSE American exchanges that traded during the entire measurement period. They excluded companies worth less than $1 billion at the beginning and $250 million at the end of their maximum drawdowns.) "The median maximum drawdown was 72% for the best group, and the median maximum drawdown duration, the time from peak to trough, was 2.9 years," they found. "The median time to return to the prior peak was 4.3 years. The median annualized abnormal returns following the bottom was 8% for the next 5 years and 12% for the next 10 years. This is based on the unrealistic assumption the stock was purchased at the low." Just thinking about one of my positions losing 72% of its value makes me queasy, even knowing full well this is the average behavior of the best stocks. Now imagine being a fund manager with the conviction to hang on to these types of stocks. Mauboussin and Callahan note that Alpha Architect's Wes Gray considered this thought experiment in a paper titled: "Even God Would Get Fired as an Active Investor." "[Gray's] point is that if you had the (godlike) foresight to build a portfolio of the stocks that would produce the highest TSRs over the next five years, you would have 'great returns, but gut-wrenching drawdowns,'" they wrote. "In other words, the drawdowns are so large that a client who hired you to be their active manager might fire you." The analysts considered the performance of the S&P 500 over this measurement period to show the benefits of diversification. "The maximum drawdown for the index was 58%, the maximum drawdown duration was 1.4 years, and the time to recover back to par was 4.2 years," they observed. "Following the trough, the annual TSR for the S&P 500 was 25% over 5 years and 17% over 10 years." So maybe your return isn't as high as investing in the top performing stocks. But the max drawdown for the S&P is shallower, and the duration of that drawdown is much shorter. Obviously, you'd still opt for the more painful drawdowns if you knew you would outperform the market over time. Unfortunately, almost no one has a consistent track record of identifying those long-term winners. And there are a lot of stocks with underperforming returns, including a whole lot of stocks that never recover from their max drawdowns. "The median stock's recovery from its maximum drawdown is 90% of the prior peak price (par), which means it fails to return to its past high," they found. "In fact, about 54% of stocks never return to par after hitting bottom." (Note: For this review, they considered stocks listed on the NYSE, NASDAQ and NYSE American exchanges that traded during the entire measurement period. They only considered stocks that worth worth at least $1 million at the end of any month.) One of the more notable findings in this study is that the average recovery from a drawdown is a whopping 338.5%, to which the analysts said: "This tells you that some stocks produced very high returns off of the bottom." Indeed, a few stocks — some generating >1,000% returns — can be responsible for the bulk of a portfolio's returns. To put it another way, the median 89.5% recovery figure tells us it's very hard to pick winning stocks. Meanwhile, the average 338.5% recovery figure tells us that a broadly diversified portfolio with exposure to all stocks can generate returns that multiply the value of your initial investment. Legendary stock picker Peter Lynch once said: "In the stock market, the most important organ is the stomach. It's not the brain." This is true for investors in broadly diversified index funds. This is even more true for investors who aim to pick stocks with the aim of producing market-beating returns. There were several notable data points and macroeconomic developments since our last review: 🏭 Business investment activity declines. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 1.3% to $74.8 billion in April. Core capex orders are a leading indicator, meaning they foretell economic activity down the road. The recent decline could portend slowing growth in the months to come. For more on core capex, read: ⚠️ 👎 CEO confidence tanks. From The Conference Board's Stephanie Guichard: "CEO Confidence collapsed in Q2 2025 after surging in Q1. CEOs' views about current economic conditions led the plunge, registering the largest quarter-on-quarter decline in almost 50 years. Expectations for the future also plummeted, with more than half of CEOs now expecting conditions to worsen over the next six months, both for the economy overall and in their own industries. CEOs' assessments of current conditions in their own industries—a measure not included in calculating the topline Confidence measure—also fell sharply in Q2. The vast majority of CEOs (83%) said they expect a recession in the next 12-18 months, nearly matching the percentage who feared recession in late 2022 and early 2023. The US–China trade deal announced on May 12 seems to have eased, but not removed, concerns about the future." From the firm's Roger Ferguson: "CEOs named geopolitical instability, followed by trade and tariffs, as the two top business risks impacting their industry in Q2. Regulatory uncertainty followed close behind, while cyber risks—which dominated CEOs' concerns over the past two years—dropped down to 4th place. As in previous quarters, a majority of CEOs indicated no revisions to their capital spending plans over the next 12 months. Still, consistent with more pessimism about the outlook in their own industries, the share of CEOs expecting to revise down investment plans doubled in Q2 to 26%, while the share expecting to upgrade investment plans dropped 14 ppts to 19%." For more on deteriorating sentiment, read: 📊 and 😵💫 🚢 Imports sink. Here's Bloomberg on April Census data: "[G]oods imports plummeted by a record as companies adjusted to higher tariffs. …data showed an almost 20% slump in imports, leading to a massive narrowing in the US merchandise-trade deficit in April. … Besides the punitive tariffs in place last month on Chinese products, the slump in goods imports probably reflected a reversal in the inflow of pharmaceuticals following a surge in March and a decline of gold imports…" For more on volatile imports, read: 🤷🏻♂️, 🤔, and 🤔 🎈 Inflation cools. The personal consumption expenditures (PCE) price index in April was up 2.1% from a year ago. The core PCE price index — the Federal Reserve's preferred measure of inflation — was up 2.5% during the month, down from March's 2.7% rate. While it's above the Fed's 2% target, it remains near its lowest level since March 2021. On a month over month basis, the core PCE price index was up 0.1%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 2.7% and 2.6%, respectively. For more on inflation and the outlook for monetary policy, read: ✂️ and 🧐 🛍️ Consumer spending ticks up. According to BEA data, personal consumption expenditures increased 0.2% month over month in April to a record annual rate of $20.67 trillion. 💳 Card spending data is holding up. From JPMorgan: "As of 23 May 2025, our Chase Consumer Card spending data (unadjusted) was 1.5% above the same day last year. Based on the Chase Consumer Card data through 23 May 2025, our estimate of the US Census May control measure of retail sales m/m is 0.48%." From BofA: "Total card spending per HH was up 0.2% y/y in the week ending May 24, according to BAC aggregated credit & debit card data. The shift in Memorial Day (5/26/25 vs. 5/27/24) likely weighed on y/y total card spending growth in the week ending May 24. Initial read suggests that we could be getting a softer Memorial Day spending weekend this year likely due to colder weather." May spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs. For more on consumer spending, read: 😵💫 and 🛍️ 💼 Unemployment claims tick higher. Initial claims for unemployment benefits rose to 240,000 during the week ending May 24, up from 226,000 the week prior. This metric continues to be at levels historically associated with economic growth. For more context, read: 🏛️ and 💼 👍 Consumer vibes improve. The Conference Board's Consumer Confidence Index ticked higher in May. From the firm's Stephanie Guichard: "Consumer confidence improved in May after five consecutive months of decline. The rebound was already visible before the May 12 US-China trade deal but gained momentum afterwards. The monthly improvement was largely driven by consumer expectations as all three components of the Expectations Index—business conditions, employment prospects, and future income—rose from their April lows. Consumers were less pessimistic about business conditions and job availability over the next six months and regained optimism about future income prospects. Consumers' assessments of the present situation also improved." Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: 🙊 and 🛫 👎 Consumers feel worse about the labor market. The Conference Board's Guichard noted: "However, while consumers were more positive about current business conditions than last month, their appraisal of current job availability weakened for the fifth consecutive month." From the firm's May Consumer Confidence survey: "Consumers' views of the labor market weakened in May. 31.8% of consumers said jobs were 'plentiful,' up slightly from 31.2% in April. 18.6% of consumers said jobs were 'hard to get,' up from 17.5%." For more on the labor market, read: 💼 ⛽️ Gas prices tick lower. From AAA: "With crude oil prices lingering in the low $60s per barrel, drivers are reaping the benefits at the pump. The national average is down about 3 cents from last week, returning to what it was a month ago: $3.16. While fuel prices are expected to remain on the lower side compared to last summer, weather is the wild card. The Atlantic hurricane season begins Sunday, and NOAA predicts a 60% chance of an above-normal season. Storms along the Gulf Coast can affect oil refineries and disrupt fuel deliveries, leading to a temporary increase in gas prices." For more on energy prices, read: 🛢️ 🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.80%, up from 6.86% last week. From Freddie Mac: "This week, the 30-year fixed-rate mortgage rose slightly higher. Aspiring buyers should remember to shop around for the best mortgage rate, as they can potentially save thousands of dollars by getting multiple quotes." There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates. For more on mortgages and home prices, read: 😖 🏚 Home sales fall. Sales of previously owned homes fell by 0.5% in April to an annualized rate of 4.0 million units. From NAR chief economist Lawrence Yun: "Home sales have been at 75% of normal or pre-pandemic activity for the past three years, even with seven million jobs added to the economy. Pent-up housing demand continues to grow, though not realized. Any meaningful decline in mortgage rates will help release this demand." Prices for previously owned homes increased from last month's levels and year ago levels. From the NAR: "The median existing-home sales price for all housing types in April was $414,000, up 1.8% from one year ago ($406,600). The Northeast and Midwest posted price increases, and the South and West registered price decreases." 🏘️ New home sales rise. Sales of newly built homes rose 10.9% in April to an annualized rate of 743,000 units. 🏠 Home prices cool. According to the S&P CoreLogic Case-Shiller index, home prices were up 3.4% year-over-year in March but declined 0.3% month-over-month. From S&P Dow Jones Indices' Nicholas Godec: "Home price growth continued to decelerate on an annual basis in March, even as the market experienced its strongest monthly gains so far in 2025. This divergence between slowing year-over-year appreciation and renewed spring momentum highlighted how the housing market shifted from mere resilience to a broader seasonal recovery. Limited supply and steady demand drove prices higher across most metropolitan areas, despite affordability challenges remaining firmly in place." 🏢 Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 62.2% on Tuesday last week, down 1.1 points from the previous week. Only Chicago and San Francisco experienced decreases of more than two full points, falling 3.4 points to 68.6% and 2.8 points to 49.4%, respectively. The average low was on Friday at 34.8%, up three tenths of a point from the previous week." For more on office occupancy, read: 🏢 👍 Activity survey improves. From S&P Global's May U.S. PMI: "Business confidence has improved in May from the worrying slump seen in April, with gloom about prospects for the year ahead lifting somewhat thanks largely to the pause on higher rate tariffs. Current output growth has also picked up from April's recent low, which had seen the weakest rise for over one-and-a-half years, in response to an upturn in demand. However, both sentiment and output growth remain relatively subdued, and at least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues, most notably the potential for future tariff hikes after the 90-day pause lapses in July." Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data. For more on this, read: 🙊 🇺🇸 Most U.S. states are still growing. From the Philly Fed's April State Coincident Indexes report: "Over the past three months, the indexes increased in 42 states, decreased in five states, and remained stable in three, for a three-month diffusion index of 74. Additionally, in the past month, the indexes increased in 35 states, decreased in nine states, and remained stable in six, for a one-month diffusion index of 52." 📈 Near-term GDP growth estimates are tracking positive. The Atlanta Fed's GDPNow model sees real GDP growth rising at a 3.8% rate in Q2. For more on GDP and the economy, read: 📉 and 🤨 🚨 The tariffs announced by President Trump as they stand threaten to upend global trade — with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here's where things stand: Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices. Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market. But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny. Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up. Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth. Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets. Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened. Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue. A version of this article first appeared on Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Business Insider
16 hours ago
- Business Insider
Morgan Stanley Keeps Their Hold Rating on SanBio Co (SNBIF)
In a report released on May 29, Shinichiro Muraoka from Morgan Stanley maintained a Hold rating on SanBio Co (SNBIF – Research Report), with a price target of Yen1,400.00. Confident Investing Starts Here: Muraoka covers the Healthcare sector, focusing on stocks such as SanBio Co, Astellas Pharma, and Daiichi Sankyo Company. According to TipRanks, Muraoka has an average return of -3.9% and a 33.33% success rate on recommended stocks. The word on The Street in general, suggests a Moderate Sell analyst consensus rating for SanBio Co with a $5.83 average price target. Based on SanBio Co's latest earnings release for the quarter ending January 31, the company reported a quarterly GAAP net loss of $730.52 million. In comparison, last year the company had a GAAP net loss of $761.28 million
Business Insider
16 hours ago
- Business Insider
Morgan Stanley Remains a Hold on Nomura Holdings (NRSCF)
In a report released on May 29, Mia Nagasaka from Morgan Stanley maintained a Hold rating on Nomura Holdings (NRSCF – Research Report), with a price target of Yen940.00. Confident Investing Starts Here: Easily unpack a company's performance with TipRanks' new KPI Data for smart investment decisions Receive undervalued, market resilient stocks right to your inbox with TipRanks' Smart Value Newsletter According to TipRanks, Nagasaka is an analyst with an average return of -1.6% and a 42.86% success rate. Nagasaka covers the Financial sector, focusing on stocks such as Chiba Bank, MS&AD Insurance Group Holdings, and Nomura Holdings. The word on The Street in general, suggests a Hold analyst consensus rating for Nomura Holdings. Based on Nomura Holdings' latest earnings release for the quarter ending June 30, the company reported a quarterly revenue of $1217885000 thousand and a net profit of $68.94 billion. In comparison, last year the company earned a revenue of $317.42 billion and had a net profit of $23.33 billion
