Research Preview: Lost In Translation?
We are curious if factor ETFs have provided downside protection in recent years’ selloffs or whether their defensive nature, shown by academic studies, is lost in the translation to live-money portfolios.
Like January, February’s CPI figures were hotter than expected. Stickier inflation data, spiking breakeven rates, and fewer Fed cuts haven’t scared the equity market one bit.
Read moreFactor performance was decidedly risk-on in February. Through month end, high-momentum names have outperformed the universe by 6.7%—we have to go back to the Tech Bubble to find a year when momentum had a stronger start.
Read moreImprovement in bank lending trends should be a tailwind for economic activity, while steeper yield curves also imply a looser lending environment lies ahead. Another area supporting U.S. economic resilience is the wealth effect: The surging wealth effect is boosting consumer confidence which, in turn, leads to higher consumption.
Read moreIt’s been 26 months since the all-time peaks the NYSE Weekly and Daily Advance/Declines Lines. The weakness in the Daily version is especially troublesome given the strong upward bias it’s exhbited since 2001. In addition, figures for 52-Wk. New Highs and New Lows have been anemic relative to the major index gains—especially among NASDAQ stocks.
Read moreBreadth and leadership of this bull market have fallen short of the typical patterns of early-cycle bulls, even if contrasted only to other new bulls that did not emerge from recessionary lows, like 1962-66 and 1987-90. Still, participation looks broad enough that the odds are against an imminent cyclical peak.
Read moreMentions of the yield curve by the financial media and market pundits have plummeted the last few months. That’s understandable, but dangerous. We remember the same happening in 2007—with one of the more memorable dismissals coming from Fed Chair Bernanke.
Read moreOn its face, the second month of Q4 reporting was much more positive than the first. After sagging in January, the S&P 500 bottom-up EPS estimate rose back to $54—almost exactly where it stood before Q4 announcements got underway (Chart 1). With just a few stragglers left to report, full-year 2023 EPS will come in at $214. That’s almost 9% better than 2022’s final result.
Read moreReal Estate was the top performing sector in the final quarter of 2023, climbing an impressive 18.8% against the market’s 11.7% gain. Signs of enthusiasm for the REIT industry have been rare in recent times. While the S&P 500 gained 96% over the last five years, REITs returned a paltry 31% over that time. We wondered if last quarter’s success signaled that it was time to take a fresh look at the group. This report examines the investment merits of REITs as an asset class, using the mental model of evaluating “what you pay vs. what you get.”
Read moreCPI readings were a tad hotter than estimates again in January. Given the speed of disinflation that’s currently priced in by the market, we are probably headed toward a period of expectation adjustment.
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See this week's Major Trend Index Update.
Read moreIt’s too soon to know if the October low for small caps will stand, but it would have been a better, more buyable low if it had been accompanied by a recession. It’s all about “initial conditions.” Russell 2000 lows associated with recessions bottomed with a normalized P/E multiple nearly five points below that of the median multiple for non-recessionary lows—and subsequently gained an average of 185% versus +75%.
Read moreThe stock market remains “externally” strong, with the S&P 500 and DJIA at new all-time highs on February 2nd. However, the YTD performance gap between the S&P 500 and the Russell 2000 is already 8%—the worst five-week start ever for Small Caps on a relative basis. And, on a trailing 12-month basis, the percentage of S&P 500 stocks outperforming the index, itself, is the lowest on record at just 25.6%. That’s made it a challenging time for active managers and dart-throwers alike.
Read moreThe probability of a soft landing has materially increased, while stronger than expected growth is likely to put a floor on inflation, which challenges the consensus disinflation view. A refresh of our Dollar Monitor suggests a weaker dollar going forward.
Read moreWhile mid- and small caps notably underperformed, large growth results were freakish. Measured against the S&P 500 Growth index, an implausible 96% of active large growth funds beat that benchmark—a result that stands as one of the most extreme win rates ever seen for a style box.
Read moreSince the pandemic, investors have been leery of adding REITs to their asset mix due to fears that flexible scheduling and work-from-home will permanently diminish the demand for office space. While that view may prove correct, the magnitude of such a change is much less significant than some might suspect.
Read moreWell, it’s Groundhog’s Day Earnings Season… again. With the first month of results for Q4, operating earnings estimates for the S&P 500 continued their long slide from their optimistic highs set back in June of 2022 (Chart 1). The 20% drop in projected EPS didn’t stop the index from rallying +30% over those 19 months. Full-year 2023 operating EPS is now crystallizing around $210—a 7% gain from 2022’s results.
The Magnificent Seven’s remarkable performance defines the stock market in 2023. This basket of the seven largest companies in the S&P 500 index gained an average of 111% vs. an average gain of 9% for the other 493 companies. The combined impact of huge index weights and outsized performance made 2023 one of the most top-heavy markets in history. Whenever assets outperform to this degree over just a few quarters, the valuation alarm bells start clanging. Could the fundamentals possibly justify such a massive advance, or is AI mania responsible for the outperformance?
Read moreCPI readings for December were a tad hotter than estimates. The path forward is unlikely to be a straight line down. Watch geopolitics closely, as it could drive prices in either direction very quickly.
Read moreOver the entire history of this study, the momentum plays of our “Dreams” and “Nightmares” have worked both ways. This was not the case in 2023, however, as the fortunes for both groups (based on 2022 performance) U-turned in a considerable way.
Read moreGiven how many potential political and geopolitical hotspots there are at present, it might be a bit presumptuous to think 2024 will be a typical year. Politics and geopolitics are the most underpriced risk for 2024.
Read moreIn the theme that’s reminiscent of all but a couple of the last 15 years, the optimal strategy for equity managers and asset allocators in 2023 was the same: Buy the S&P 500, and then hit the links.
Read moreThere are reports that 40% with student loans did not make an initial payment when installments resumed in October. Meanwhile, among seniors aged 65-79, the share with a mortgage rose to 41% in 2022, up from 24% in 1989, while the percentage of those aged 80+ with a mortgage increased from 3% to 31% during the same time!
Read moreRemember the nickname for retired San Antonio Spurs star Tim Duncan? “The Big Fundamental.” The stock market itself is a big fundamental—and that’s probably truer now than in past cycles, since market capitalization relative to U.S. GDP is larger today—with the exception being the most extreme phase of the post-COVID mania.
Read moreSpeculating on the link between style performance and interest rates is a favorite pastime of factor aficionados, but 2023 provided a real-time laboratory to evaluate those ideas. We examined factor returns during the interest rate swings to uncover some empirical insights into this important relationship.
Read moreWhenever a basket of stocks with the market heft of the Magnificent 7 shows a price gain of 111% in a single year, the valuation alarm-bells ring loud. Is this gain the result of a mania for all things AI, or could the move be justified by equally magnificent fundamentals?
Read moreDepending on how you measure it, with a few days to go, it’s either been a superbly profitable 2023 or a year that barely crept above the 30-year average.
Read moreThis looks like a market that has made up its mind about inflation and a coming soft landing. Inflation and Economic Surprises in 2023 have helped form this rosy outlook.
Read moreThe S&P 500’s 8.9% November gain ranks as the 18th largest over the 800 months since the index’s inception in March 1957. Are such short-term market spikes typically followed by additional upside? The evidence is not quite as compelling as the data-mined analysis we found on X (formerly Twitter) initially had us believing.
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