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There is, in today's markets, an abundance of things that there aren't enough of. The theme of scarcity is animating many of the most prevalent investing themes.
Most obvious, of course, is the scarcity of physical resources, which has kept commodity prices, farmland values and fears about the threat to global growth elevated. Even sitting well off its springtime highs, the Reuters-Jefferies CRB index is up more than 25% in the past year, and Western governments last week felt it necessary and prudent to release some official oil reserves to blunt the threat of more energy inflation. And the zeal to own gold, notwithstanding the metal's recent pullback, reflects a lack of comforting alternatives to the dollar and other Western currencies as stores of value.
Less apparent, but arguably more important, is the way scarcity in intangible things is swaying investors' priorities. The global shortage of investment income, or yield, comes quickly to mind. The corporate-credit market remains firm, in spite of the shudders running through the European sovereign-bond universe.
The marquee exchange-traded funds that track key fixed-income segments, iShares iBoxx Investment Grade Corporate Bond (ticker: LQD) and iShares iBoxx High Yield Corporate Bond (HYG), have continued to briskly attract assets and trade closer to their recent highs than the major stock indexes. The iShares Dow Jones U.S. Real Estate Investment Trust (IYR) has outperformed stocks for any period you'd like to check over the past couple of years, despite continued struggles in commercial real estate.
Investors clearly feel compelled to substitute credit or other economic risk for zero-yielding cash, in the hunt for income. This is not a mere byproduct of the Fed's zero-interest-rate policy, but one of its main aims. The risk, naturally, is that folks are taking more risk than they'd prefer or than they recognize.
Then there is the scarcity of organic, long-term corporate growth. Wall Street keeps pointing to the rather undemanding-looking valuation now being applied to the stock market, with S&P 500 companies fetching about 13 times this year's expected earnings. The majority of stocks are clustered in a rather narrow valuation band. Indeed, by some quantitative measures, the S&P's current value implies only about 1% average annual long-term earnings growth for stocks, versus the 6% historical average.
But a small subset of companies with perceived hyper-growth potential teeter atop towering multiples, as growth-hunting investors flock to them for want of bankable growth elsewhere. These include Salesforce.com (CRM), Netflix (NFLX), Chipotle Mexican Grill (CMG) and Green Mountain Coffee (GMCR).
There is also a scarcity of alpha, or good risk-adjusted returns. Hedge funds, the predominant seekers of an investment edge on every given day, have struggled this year to stay even. These firms promise absolute return, but there simply isn't enough of it available in a low-yield, fitfully growing world to go around for all the funds that promise it to their investors.
Average investors face a related problem. So, arcane strategies sprout, many of them courtesy of an opportunistic exchange-traded-fund industry. There are more than a dozen ETFs that allow everyone, including your boneheaded neighbor, to trade permutations of the VIX index, which measures stock-market volatility.
Stocks move in price, indexes measure their collective movement, options on the index are traded, VIX measures one element of options pricing, VIX futures are traded in anticipation of coming VIX moves, then ETFs own the VIX futures. Millions of dollars a day, therefore, are traded in a derivative of a derivative of a statistical byproduct of other derivatives' pricing. This is but one example of products that offer bets on subtle market relationships, such as a recently launched fund intended to profit from the forward pricing curve in crude oil.
No wonder investors generally are glum and perplexed. Not only is there little low-hanging fruit, but investors feel forced to climb to the top of trees just to eat the leaves. If there is a dim silver lining, it is that all of this stretching hasn't built many obvious excesses in the broad list of stocks.
In fact, dividend-rich shares—see the iShares Dow Jones Select Dividend Index ETF (DVY)–have outpaced the market in recent months. That's partially due to investors' rotation toward defensive strategies, but it no doubt also has been encouraged by the realization that the Fed will suppress rates for quite some time. This is one area buoyed by the scarcity theme that seems worthy of further attention from investors.
E-mail: michael.santoli@barrons.com
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