Factor Frontiers And Investing To The Max
Quantitative investing has taken the industry by storm over the last decade, and smart beta ETFs are pulling in billions of dollars as investors and advisors gravitate to this portfolio management technique.
Cyclicality is Scarce?
Better economic reports in the U.S. and about the globe are slowly reducing imminent recession worries. For example, today’s favorable reports on U.S. retail sales, unemployment claims, and the Leading Economic Indicator reinforces the likelihood the expansion perseveres.
Read moreSmall Caps And The Recent “Rate Hike”
The 1999 leadership parallels we discussed in the latest Green Book remain intact—U.S. over foreign, Growth over Value, and Large over Small. Small Caps have given up most of the “beta bounce” enjoyed in the first two months off the December low, with one Small Cap measure—the Russell Microcap Index (the bottom 1000 of the Russell 2000)—undercutting last year’s relative strength low and those of 2011 and 2016.
Read moreMTI: Dead Neutral
The Boom/Bust Indicator, a weekly ratio of industrial-commodity prices to initial unemployment claims, has had a near-vertical rebound to old highs in the last several weeks. This index usually peaks out many months in advance of a business cycle peak (although not in 2007, when it provided no warning of the pain to come).
Read moreExposed To ‘Margin’ Investments?
U.S. profit margins have widened significantly in the last couple decades. Total U.S. corporate profits as a percent of GDP averaged only about 8% in the 20 years leading up to 2000, but has since risen by almost 30%, averaging 10.5%. Similarly, the overall profit margin among S&P 500 companies has increased steadily in this recovery to record highs!
Read moreMargins Prove Capitalism Still Works
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Corporate profits were outstanding last year, but even the benefit of a 40% cut in the top income-tax rate wasn’t enough to lift the net profit margin back to the all-time high of 10.6% established in early 2012. Still, the latest 10.0% figure is more than a percentage point above the 2007 cycle high and about two points better than any other cycle high.
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Inflation Remain Contained
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The latest CPI numbers are largely in line with market expectations. The recent rebound in oil prices certainly helped the recovery in inflation expectations. Recent U.S. economic numbers have been decent overall and the latest uptick in the U.S. ISM index also offers support for inflation.
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MTI: Momentum Keeps Gaining
If the market’s manic rebound succeeds in assuaging consumers’ recently shaken confidence, we can certainly see a scenario in which the economy and corporate profits firm up after their current slowdown… although that is not our bet.
Read moreEmbrace Your New Sugar Daddy!
Many believe the contemporary bull market has been nothing more than a Sugar High produced by massive and unprecedented monetary easing. In the last couple years, however, the Federal Reserve has raised interest rates and allowed its balance sheet to run off, weaning the markets from its sugar.
Small Cap Biotech Getting Pricey Again
In May 2015, we warned about rich valuations for small cap Biotech stocks and looked at various ways to evaluate those companies, as the majority have no approved drugs on the market, thus no revenue; therefore, valuing these companies using the conventional methodology is problematic.
Read moreA Confidence Game
Several consumer confidence gauges plunged in the wake of the Q4 market decline (as expected), and then rebounded in a lagged response to the stock market recovery (again, as expected). But March saw the largest one-month drop in consumers’ assessment of their “Present Situation” since 2008.
Read moreMovies & Entertainment & Broadcasting Revisited
Performance has been robust for this group, rising on a relative strength basis since the end of 2017. Its diverse mix of constituents equates to a group that, overall, is middle-of-road in terms of beta and volatility relative to other industries. These dynamics have contributed to its solid relative returns across diverging market environments of late.
Read moreFlows Muted For Most Equity Categories
As of the end of February, net cash flow into equity fund categories was subdued compared to that logged for the first two months of 2018.
Read moreMTI: Valuation Factors Still A Drag, But Well Below Extremes
The Intrinsic Value category remains a drag on the MTI but is well below cycle extremes seen in January 2018 and again in September. The Momentum category, however, continues to nudge the MTI higher for the third consecutive week.
Read moreA Rally With Fundamental Foundations?
A legitimate concern facing investors is how quickly, and how much, the stock market has recovered while economic and earnings fundamentals have deteriorated. Without improving fundamentals, this rally appears overdone—based on hope—and increasingly suspect.
Read moreThe Cycle Is Over If Confidence Fades Further
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The “Expectations” component of the Consumer Confidence survey has been wobbly in the last few months, but the latest report, released on Tuesday, showed the first meaningful hit to consumers’ “Present Situation” since the stock market first began to struggle 14 months ago (Chart 1).
Read moreHas The Yield Curve Been TRUMPed?
The U.S. yield curve has inverted (at least the 10-year Treasury yield to either the 3-month T-bill or the Fed funds rate) and captured the full attention of investors. Rightly so, since a yield curve inversion has historically been an excellent indicator of a pending recession. However, a condition that has always existed in the post-war era when the yield curve has inverted is absent today.
Read moreMTI Remains Low-Neutral
One of our long-term momentum models improved last week, while the Dow Bond Oscillator—as good of a mechanical monetary indicator as we’ve encountered—pushed further into positive territory.
Read moreHow SWEET It Is!
Stocks do best in times of general price stability. In the post-war era, the stock market has provided investors with significantly higher returns and lower risk whenever the annual rate of consumer price inflation has been between 1% and 3%. However, when outside this “Sweet Spot”—when the porridge is either too hot or too cold—investment results are far less hospitable.
Read morePartying Like It’s 1998-99
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We thought Jerome Powell’s “Christmas Capitulation” would be tough to beat, but he accomplished that two days ago with what could be called his “Spring Surrender.” That, in turn, has rekindled hopes of a stock market melt-up along the lines of 1998-99, which, as old-timers will remember, followed a late-cycle correction that was nearly identical to the one seen last year.
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Economic Work Lifts MTI Into Neutral Zone
Within the Economic work, the big development was a bullish flip in our Dow Bond Oscillator (DBO), which crossed above the zero threshold by the thinnest of margins. Subjectively, however, we are troubled that government yields across the maturity spectrum have been holding near recent lows in the face of equities’ powerful rally.
Read moreGrowth & Inflation?
U.S. economic growth has recently slowed and may weaken further in coming months. Moreover, inflation still lingers—commodity prices have bounced, both core consumer and producer price inflation remain near recent highs, and wage inflation is steadily rising. Investors face two big questions.
Read moreBe Wary Of The “E” In P/E
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U.S. equity valuations remain considerably higher than those of any major foreign market, but there’s no denying they’ve improved from the cyclical peak made in January 2018. That’s true across the capitalization spectrum, and on the basis of both normalized and non-normalized fundamentals.
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Don’t Hold Your Breath On Inflation
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The latest CPI numbers were slight misses and at the bottom end of their contemporary ranges. The recent rally of risk assets might be the only tail wind we can find for future inflation. The stark difference in durable and non-durable goods inflation is an excellent study in globalization.
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MTI: Valuations Ignoring Indications Of An Earnings Recession
Valuations seem to ignore indications that an earnings recession has begun, let alone the possibility that S&P 500 GAAP Earnings Per Share for 2018 could represent not just a short-term peak, but perhaps a cyclical peak as well.
Read moreBond Market Message?
The stock and commodity markets have been messaging confidence in the future of this economic recovery since the December stock swoon. The S&P 500 has surged by about 10% so far this year on strong breadth led by economically-sensitive small cap stocks and cyclical sectors, while traditional defensive equities have lagged.
Read moreSo Long Tax Cuts… We Hardly Knew Ye
Our earnings waterfall analysis for the fourth quarter tells a story consistent with the entirety of 2018: earnings growth was fantastic, boosted by the twin drivers of strong sales growth and a lower corporate tax rate. Chart 1 spotlights the quarter’s tally, which produced a healthy sales growth number despite some economic weakening.
Read moreThe Emerging Markets Dilemma
We’ve been either light on Emerging Market stocks or out of them altogether since early 2011, but have lately been watching for an opportune time to re-enter.
Read moreThe Correction In Historical Context
While it’s too early to let the ink dry on the accompanying table and chart, we’ve decided to add last year’s decline for comparative purposes.
Read moreYet Another Anniversary?
We received two media calls in December hoping we would comment for upcoming special features about the tenth anniversary of the bull market. We rolled our eyes.
Read morePrice To Book: The King Is Dead
Since the earliest days of security analysis—when the main question was which railroad stock to buy—Price to Book has been a cornerstone of the valuation process.
Read moreBeta & Volatility On The Move
We explore these factors’ behaviors from the stance of our proprietary equity group universe and present industry ideas—across sectors—that fit each of these investment viewpoints. The intent is to offer new investment ideas from a different analysis perspective.
Read moreThe Great British Breaking Show—All You Need To Know About Brexit
The biggest near-term wild card is the infinitely confusing and hopelessly unpredictable Brexit.
Read moreMomentum Factors Reflect Breadth Of 10-Week Rally
All of the domestic and global quantitative Chart Scores in the Momentum category are now positive and both the Advance/Decline and High/Low figures leave no doubt as to the breadth behind the market’s 10-week rally.
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‘Betting To Beat’ The Market?
The macro-investment environment can be simply described by two dimensions—the directions of real growth and inflation. Since the performance of both the stock and bond markets are highly responsive to these two factors, investors need to be mindful of their macro bets.
Read moreAssessing The Cyclical Risks
With all the excitement over the Fed’s shift in rhetoric and the excellent subsequent market action, there’s a danger of losing sight of the broader cyclical backdrop for U.S. stocks. Remember, the economy is still operating beyond government estimates of its full-employment potential, and it’s not as if the Fed has actually eased policy—as it did successfully at a similar late-cycle juncture in the fall of 1998 and (ultimately unsuccessfully) in the summer of 2007.
Read moreMTI: Still Negative, But Gap Narrows
The MTI’s stubbornness during the current rally confirms our overall sense that cyclical risks facing U.S. equities remain high. That said, we have great respect for the action of the market itself—enough so that we’ve allowed net equity exposure in our tactical funds to drift upward.
Read moreBalance Sheet Recession Risk?
Arguably, the biggest risk facing the stock market is a recession. Currently, traditional recession gauges are mostly comforting and a key indicator—balance sheet health—is remarkably strong. Often, recessions occur when financial health deteriorates, limiting household or business capabilities and lowering confidence.
Read moreMomentum Buyers: Beware
Momentum is a smart beta factor that gives investors excellent upside participation in rising markets. Most other smart beta factors are defensive plays, so Momentum is the place to be in strong upward moves. Momentum filled that role admirably in recent years, rising 56% from 2016 to the September top, compared to an average of +26% for the other major factors.
Read moreMTI: Momentum Strengthens
Momentum category gain was driven by strength in breadth measures, selected trend models, and most of the Chart Scores.
Read moreMake RISK Great Again!
Economic growth in the contemporary expansion has been perpetually weaker than any in the post-war era. Many explanations have been offered for why the U.S. is stuck in low gear, including aging demographics, overextended balance sheets, overused and increasingly ineffective economic policies, and a tech-boom-induced world awash with excess capacity.
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