Valuations
Low Quality Stocks Dominate
Investors brushed off a global economic slowdown and drove up the value of risky assets. Current low-quality leadership has been in place for eight months thus far.
Foreign Equities: Cure For Altitude Sickness?
When we complain about the stock market’s inflated valuation levels, we’re unintentionally giving short shrift to the 50% of the global-market capitalization that resides outside the U.S. We’d be hard-pressed to describe the valuation of Developed foreign markets as any higher than neutral.
Beta Rotation Underway
For months we’ve speculated that any major extension of the bull market would require a rotation into High Beta groups from the Low Volatility and economically-defensive themes that were the market’s big winners from mid-2015 to mid-2016.
Dependence On Initial Conditions, Valuations And Forward Returns
A client inquiry led us to take a fresh look at the relationship between current valuations and subsequent stock market returns, which is a regular feature in our Benchmarks publication.
Same Ponds, Different Fish?
The impact of atypically-high current valuations has become a challenge for style-box investing. High quality, mature dividend payers have habitually resided in the Value and Blend boxes, but investors have bid up those valuations as they look for alternatives to low bond yields.
Divergence Among Quality Factors
Performance and valuation of the three Quality factors are diverging. From a valuation standpoint, we might see a reversal in performance, with the Stability factor weakening and the Leverage factor strengthening.
Energy: Waiting For The Green Light
Despite putting in lows in January, the Energy sector has been stuck at the bottom of the GS rankings, and the sector has given up more than half its relative gain over the last several weeks. Perhaps the GS Scores will highlight a better entry point in the months ahead.
No Sector On Sale...
While cap-weighted U.S. indexes remain far below their 2000 valuation highs, in some ways today’s market presents an even more difficult hurdle for value managers.
Low Quality Dominance Since March
After two rough months moving into 2016, Low Quality stocks rallied and are now leading High Quality stocks YTD. Investors apparently brushed-off the slowdown scare from China, and later the Brexit headlines.
VLT Says “BUY”
Breadth underlying the 4-month upswing has been stronger than that observed during any other rally leg since 2013. Despite just a 14% correction in the S&P 500 from its peak, a new VLT “BUY” signal was triggered. Failed signals are relatively rare, the last one occurred in December 2001.
Valuations: The Correction That Never Was
The correction failed to meaningfully “reset” any long-term valuation measures, hence, we don’t view the current environment as having much investment merit, but rather, primarily speculative appeal.
Xenophobia Gone Too Far?
Donald Trump’s all-but-certain Republican nomination is somehow a fitting capstone to a stock market era in which it’s paid to be provincial.
Small Caps: The P/E Premium Lives On…
Small Cap valuations may look better on a relative price-to-book basis, but we still believe their Normalized P/E ratios will suffer further compression before Small Caps reclaim the leadership baton.
MTI Now Bullish, But Doubts Linger
The Major Trend Index reverted to its bullish zone in the week ended April 15th, following almost ten months in which the work resided in either neutral or negative territory.
Ruminations On The Correction
If our market disciplines turn bullish in the weeks ahead, we’ll certainly follow that lead—covering remaining shorts, re-establishing a semi-aggressive market position, and wiping egg off our faces for having called a “cyclical bear market” that slammed the Russell 2000 (-26%), EAFE (-26%), and Emerging Markets (-37%)… but somehow not the one most followed, the S&P 500 (-14%).
Another Look At Median Valuations
While the past several months’ reversion in valuation measures has certainly wrung some of the risk out of the market, if the bear market reasserts itself and drives stocks to valuations seen at average cycle lows, downside risks are still substantial.
Is Defense Overpriced?
Relative valuations of Staples and Utilities sectors already reflect a “flight to quality” effect. Investors looking to add some economic/stock market defense should focus on the cheaper Health Care groups.
Foreign Stocks Set For A New “Bear”-ing?
Based on comparative valuations alone, one could have made a case for investing in foreign stocks over domestic ones as early as 2010—when EAFE’s valuations sunk to an historical low, relative to the S&P 500. Today, that gap remains extreme.
Big U.S. Banks: We Have A Motion, Is There A Second?
YTD the S&P 500 has fallen 2% while the S&P 500 Banking industry group is down over 12%—a shortfall that has the attention of value investors and contrarians seeking a chance to buy high-quality banking franchises at fire-sale prices.
Small Cap vs Mid Cap vs Large Cap
The Ratio of Ratios bounced off last month’s multi-year low (4% Small Cap discount) but still sits firmly below its Small Cap median, which is a premium of 4%.
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