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

The month of October made this vignette a lot more interesting.

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Large Cap Value stocks were the best place to weather last month’s storm as Royal Blue Value lost “only” -6.1%. Small Cap Growth plunged 12.6%.

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The recent plunge in our Ratio of Ratios is due to significant underperformance in Small Caps. Since the end of August: Russell 2000 -13%; S&P 500 -6%.

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Our first Up/Down Ratio of Q3 stands at 2.74—the third highest “one-month” figure of the past 34 years. However, it’s by far the lowest “one-month” figure of the past three quarters.

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The S&P 500 posted its best quarterly price gain (+7.2%) since the fourth quarter of 2013. However, 37% of the year-to-date returns have come from three stocks: Amazon, Apple, and Microsoft. Those three firms have added a combined $737 billion in market cap since the start of the year.

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Growth stretched its fantastic contemporary outperformance run to seven quarters, besting Value stocks once again. Since the end of 2016: Royal Blue Growth +53%; Royal Blue Value +21%.

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The sharp divide in performance between Small Caps and Large Caps moved our Ratio of Ratios below the long-term median premium for the first time in seven months.

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We’ve reached the halfway point of the 2018 corporate earnings bonanza! The final Up/Down Ratio for Q2 2018 stands at 2.06—the highest “three-month” figure we’ve seen since 1984.

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The S&P 500 squeaked out its sixth consecutive monthly gain in September.

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 Both Headline and Core CPI figures came in below expectations and backed off their contemporary highs. The overall inflation picture is little changed and the market is still pricing in two more 2018 rate hikes. Inflation in Goods is starting to catch up to Services.

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In late January we speculated how long it would take for the S&P 500’s bloated valuations to reach more reasonable levels. The S&P 500 now trades back where it was in January and the seven-month break included some of the best growth rates most have ever seen. We found ourselves asking: Did chubby Mr. Market shed any pounds as he pedaled away on his stationary bike?

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The S&P 500 gained 3% in August creating a fresh all-time high for the index.

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The modest January air pocket went completely unnoticed by the index’s largest firms. Between the market peaks, Microsoft, Apple, and Amazon gained 15%, 26%, and 36%, respectively—adding a combined $495 billion to their market values.

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After a brief surge in July, the seemingly-cursed Value stocks quickly resumed their roles as underperformers. Our Royal Blue stock lists (institutional favorites) continue to stretch their valuations higher.

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Since the end of February—the last month Small Caps were under the historical 3.5% valuation premium—the Russell 2000 has outperformed the S&P 500: +16% versus +8%, respectively.

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The second month of Q2 earnings gives us an Up/Down Ratio of 2.08. This is the highest “two-month” reading of the current tax-reform-juiced-earnings era but a bit of a disappointment given our “one-month” figure.

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The S&P 500 got within spitting distance of its January high (price) by gaining 3.6% in July.

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The index, still a bit shy of its all-time closing high, did set a new total return high on July 25th—six months after the trouble began in January. The FAANG stocks had some divergent components in July  but still provided a big boost for the S&P 500.

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Our Royal Blue Low P/E Tier finally outperformed the High P/E Tier for the first time since November. YTD, Value stocks still lag Growth in all market cap tiers.

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The recent run up in Small Cap stocks, coupled with a less rosy (though still fantastic) trailing earnings profile, has given us the largest Small Cap premium we’ve seen in three years.

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