Research.LeutholdGroup

Driven by massive government stimulus, an imminent vaccine rollout, and the expectation of record earnings in 2021, investors seem to be on the verge of embracing a move away from Large Cap Growth stocks in earnest. The leading candidates offered as broad-based alternatives to Large Growth (LG) include Value, Small Caps, and Emerging Markets.

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This study examines Value, Small Cap, and Emerging Markets to see if they do, in fact, behave in a correlated manner when viewed as alternatives to Large Growth. The goal is to determine whether this trio of rotational favorites can be considered as broadly-equivalent replacements for LG.

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According to FactSet estimates, S&P 500 earnings for 2020 are anticipated to come in near $133 per share, a drop of 18% from 2019 results. Given the widespread business disruptions and closures caused by the pandemic, one might have expected this year’s results to be much weaker.

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Growth investing is in the midst of a spectacular run this year, extending its decade-long dominance over the Value style. Chart 1 depicts the Growth / Value relationship over the last 25 years through July 31^st, with key turning points marked by vertical lines.

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Growth investing is in the midst of a record run this year, extending its decade-long dominance over the Value style.

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Bear markets are the financial system’s version of the changing seasons—a cycle we “enjoy” to extremes here in Minnesota.

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Our recent commentary “1” For The Record Books noted that just one of seven S&P smart beta factors was able to outperform the S&P 500 last year, even though each style basket limits its holdings to constituents of the parent index.

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Dark energy makes up 68% of the universe, yet astrophysicists are having a devil of a time explaining what it is, why it is, or how it works. Quant investors are facing their own dark-energy mystery in understanding style returns of 2019.

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Style rotation! Regime change! Market action of the first two weeks of September coaxed the few remaining Small Cap Value managers off ledges from New York to San Francisco.

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One portfolio strategy that attracts our interest is a barbell between Growth or Quality on the bullish side, paired with a Low or Minimum Volatility sleeve for the bearish side. This approach deals with today’s uncertainties by essentially “deciding not to decide.”

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Social media, mobile computing, and digital life-in-the-cloud were the dominant storylines for U.S. stocks over the last five years—reaching the apex of popularity following the early-2016 market low.

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