Valuations

Momentum is one of the most widely accepted alpha-generating factors, used by quantitative and fundamental managers alike. Its biggest drawback, however, is high turnover. Herein we explore momentum from the perspective of sector weights.

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Market history teaches us that investors behave differently in groups than they do as individuals.

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We don’t have a strong capitalization-bet recommendation, other than to remind readers that Small Caps have been especially responsive to the favorable seasonal window that began November 1st (and which extends through April 30th).

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Despite cyclicality, over the longer term, investing in lower valuation countries ekes out better performance in an EM portfolio, and Dividend Yield showed the most consistency in terms of value factor effectiveness.

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Question: Your “Estimating The Downside” section shows the S&P 500 would lose 26% if it reverts to its 1957-to-date median valuation level. The downside estimate for the S&P Industrials Index, however, is almost -40%. Why such a huge difference?

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Before the markets punish an irresponsible act, they must first reward it.

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Our Major Trend Index (MTI) recently fell from “positive” toward stocks to a “neutral” reading, leading us to trim bullish equity positions in our tactical portfolios.

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Many studies have evaluated momentum factors for over/underweighting country exposures within a portfolio, but few have considered valuation factors for country rotation within the Emerging Market space.

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The Amazon Effect masks both the underperformance of the average Discretionary stock and the relative value that’s been reestablished across the sector. “Discretionary ex-Amazon” is a better contrarian pick than Energy.

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Foreign equities beat the U.S. in the first quarter, but the performance gap that’s opened up since the 2007 market highs remains astounding. While foreign equity valuations (especially within EM) have rebounded from February 2016 lows, the bounce has done little to close the enormous P/E discounts relative to the U.S. market.

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Based on a median of six measures, today’s S&P 500 valuation profile equates to the one prevailing on August 31, 1997. From there, the S&P 500 rallied >60% over the next 2 1/2 years before peaking. However, the same can’t be said of valuation readings for the “typical” or median stock.

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While the Russell 2000 loss during the 2015-16 correction was almost double that of the S&P 500, the decline did not fully erase the P/E premium Small Caps have enjoyed since the middle of last decade. The premium might need to be entirely erased before a multi-year Small Cap leadership cycle can begin.

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A look at the potential upside for the median S&P 500 stock, based on the theory that each of four valuation ratios reaches its individual all-time high set during the last phase of the 1990s’ market mania.

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We think that stocks in Trump’s current term will fall short of Obama’s gains, mostly reflecting a valuation starting point that’s almost twice as high as Obama’s was. “Managing expectations” doesn’t seem like Trump’s style, but in the case of the stock market it might not be a bad idea.

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While Wall Street is extremely well represented in the new administration, we doubt that Wall Street’s performance under Trump will come close to that enjoyed under Obama.

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We remain cyclically bullish, but it would be intellectually dishonest to try to make a serious valuation case for the stock market here.

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The S&P 500 closed the first week of January at a new cycle high, up 9.2% from the pre-election low made on November 4th.

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The above caption—and Jimmy Buffett song title—comes from the “View From The North Country” section in the first-ever Green Book published in November 1981. Not much has changed in 35 years.

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One never appreciates what he or she has until it’s gone. In our case, during the many years it was freely available, we failed to appreciate the zero interest rate. Now that it’s gone, we already feel pressured to join a game where we (and very few others) have any edge: Fed-watching. Our real edge is that we recognize this.

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Fed tapering of its QE3 asset purchase program ended two years ago this month, yet we don’t believe this episode has received appropriate recognition for the role it’s played in the relatively flat stock market environment that’s followed the onset of tapering in January 2014.

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