Investors looking for the long-awaited rebound in the Value style point to the potential for rising interest rates as a possible driver of style rotation. Higher rates would benefit many Financial companies, a sector closely linked to the Value style. In fact, many commentators believe that the Value style cannot experience a major run without the participation of Financials. We launched a research effort to examine the link between Financials and Value, seeking to understand whether there is truth in this old saw, or whether this connection is more properly classified as market folklore.
Investors looking for the long-awaited rebound in the Value style point to the potential for rising interest rates as a possible driver of style rotation. Higher rates would benefit many Financial companies—a sector closely linked to the Value style. In fact, numerous commentators believe that Value cannot experience a major run without the participation of Financials.
Financials was the “cheapest sector” in each of the last three years, and its significant underperformance versus the S&P 500 has shaved the historical “alpha” from this strategy. Still, those souls who’ve had the stomach to own the Low P/E sector each year have beaten the S&P 500 by 2.9% per annum since 1991.
Small Caps lagged during the bounce off the March lows before a late-April spurt briefly pulled them ahead of the S&P 500. Still, considering that Russell 2000 losses were so much steeper than the S&P 500’s (-43% versus -33%), we would have expected something better.
The “robustness” of the “Cheapest Sector Strategy” concept is illustrated by strong results across all rebalancing frequencies.
The top-three-rated sectors are Communication Services, Information Technology, and Financials. As recently as March, Financials ranked in 9th place out of 11 sectors; it has now placed among the top four since May. Real Estate dropped out of the top three after a two-month visit and is situated in 5th place this round. For the fifth consecutive month, the three lowest-ranked sectors are Utilities, Materials, and Energy.
Our Financials Sector Ranking has been strengthening since August—well before the Trump Bump. The addition of Regional Banks to our SI Portfolio boosts our Financials exposure to an overweight 26% versus the S&P 500’s 15% weight. Reinsurance and Developed Diversified Banks are also among the Attractively-rated options for diversification within the sector.
Forces specifically driving many Financials groups include expectations for an ongoing yield rally and a steepening yield curve, tax cuts, and loosening financial regulation. While these outcomes remain largely speculation, the odds have improved and any of these developments would be a welcome change.
The S&P 500 Financials’ four-day, 11% rally has carried the sector to a new bull market high and the best closing level since May 6, 2008. The new high eliminates one of the long-term negative divergences from the Red Flag Indicator discussed periodically in the Green Book. Another longtime “Red Flag,” the Dow Jones 65 Composite, closed yesterday only fractionally below its December 29, 2014, all-time high. This is good action.
We like to think our models and indicators help us preserve a high degree of market objectivity. But sometimes we wonder: the latest rally has progressed to the point where we see trouble afoot in both the strongest and weakest charts we can find.
We recognize that—regardless of their empirical appeal—momentum-oriented approaches aren’t suitable for every investor. For those investors, we’ve identified an alternative sector allocation strategy that’s delivered long-term results almost identical to those of the Bridesmaid approach, but which is based on a single, simple selection criterion that should appeal to the most hard-wired contrarian: The Low P/E.
On October 20th, Apple Pay was officially launched in the U.S. with great fanfare. Since the launch, we’ve heard a lot of buzz words such as “disruptive,” and “transformation,” and then “million users signed up within the first three days.” Amid this enthusiasm came the bad news that some retailers, including Rite Aid and CVS, disabled Apple Pay at their POS’ and reports broke that a retailer consortium was developing a rival payment system.
But Information Technology rises to the top of the Domestic model, while the trend of Financials domination in the Global model remains intact.
Our Domestic Scores have five Financials groups rating Attractive; these same five industry groups are Attractive in our Global model. In total, seven Financials groups rank Attractive in the Global model, with insurance groups looking particularly Attractive.
DOMESTIC GS SCORES: Among the sector rankings, Consumer Discretionary leapt from fourth to first this month. Information Technology climbed to second from third, while Consumer Staples was bumped from first to third place.
GLOBAL GS SCORES: Financials’ domination of the Attractive groups continues, and no groups rate Unattractive. Consumer Staples, Energy, and Health Care have no Attractive groups.