Articles by Phil Segner Sr. Research Analyst & Co-Portfolio Manager

This is the fourth consecutive month that our Ratio of Ratios has resided in the Small Cap discount zone. Trailing P/E ratios have surged for Large Caps and Small Caps in the last two months.

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Q4’s second month of earnings reports produced an Up/Down Ratio of 1.71. This is the lowest “two-month” figure of the past five quarters and, gasp… dangerously close to our long-term average.

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Currently, the collective intelligence of Wall Street is predicting 6% S&P 500 EPS growth in 2019. It’s also the 61-year average annual growth rate for the index, so how wrong could it be?

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After narrowly avoiding the “official” bear market label in December, the S&P 500 turned in its best monthly return in more than four years. Those forgotten rank-and-file firms finally found their voices and produced the widest monthly performance gap between the Cap and Equal Weight measures in more than eight years.

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Our Deep Cyclical group, fresh off a -19% retreat in 2018, posted its best month of performance (+11.1%) since 2011.

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Our Ratio of Ratios normalized a bit in January. P/E expansion was a little more dramatic for Small Caps as the Russell 2000 posted its best monthly performance in eight years.

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Our first Up/Down Ratio for Q4 stands at 2.87. During the 2018 earnings bonanza, we’ve had a very wide range of stratospheric “one-month” readings (2.74 to 3.67).

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Alas, December’s cheaper valuations may have only been temporary.

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There was a lot less Christmas cheer with the market down 15% through Christmas Eve. The S&P 500 was propped up by a few big firms in 2018. Our 25-Largest firm average ended the year in positive territory and bested the Equal Weighted Average by almost 11%.

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Our tech-heavy Royal Blue Growth segment faltered toward the end of the year but held up better than any other segment in a rough 2018.

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This is the farthest our Ratio of Ratios has dipped into the Small Cap P/E discount zone since 2003.

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With Q3 earnings season complete, our Up/Down Ratio stands at 1.85. We’re now left with one quarter of the sweet 2018 vintage to report—but take note of the tough YOY comparison on deck.

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December’s 9% drop in the S&P 500 made this vignette a lot more interesting.

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Lower oil prices are dragging down the headline number. Markets are urging the Fed to take a pause in hiking. Core inflation remains in a healthy, tight range. Wealth effect concerns may drag on future price increases.

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An eleventh hour surge in equity prices salvaged a positive month for the S&P 500.

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Since the latest trouble began on October 10th, the S&P 500 has experienced gains or losses in excess of 1% in 20 of the 39 trading days. Prior to October 10th, we saw only eight such days during the six month “melt up.” The Equal Weighted Average broke a four-month relative-performance losing streak to the Cap Weighted measure. Over the past 24 months: Cap Weighted +25.5%; Equal Weighted +18.4%.

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Our tech-heavy Royal Blue Growth segment underperformed for the second month in a row. Despite these rare missteps, the group still has a solid YTD return of +8.7%.

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Small Caps are selling at a 2% valuation discount to Large Caps. Our Ratio of Ratios moved into the Small Cap P/E discount zone for the first time in 15 months.

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Our second Up/Down Ratio of Q3 stands at 1.88—this is the weakest “two-month” reading we’ve seen in the last four quarters. The energy selloff has us thinking about the up/down struggles of the 2014-15 Energy-sector earnings washout.

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After pulling the load for so long, the much loved FAANG stocks proved to be a liability for the index. Coming into the month, the FAANGs accounted for 12.8% of S&P 500 market cap. When October was through, the five firms made up 20% of the losses, wiping out a collective $330 billion (one XOM) in market cap.

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