Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
Earnings Momentum
With the final month of Q3-21 earnings in the books, our Up/Down ratio is 1.52. This “average” figure for Q3 seems a little too “late cycle” given the outsized earnings, sales, and margin rates.
Small Cap vs Mid Cap vs Large Cap
This reading marks the widest Small Cap discount of the last 18 months. We seem primed, once again, for Small Cap outperformance in 2022 based on our Ratio of Ratios. However, that process may be grinding and long.
Growth vs Value vs Cyclical
In a reversal of 2020, Small- and Mid-Cap Value dominated their Growth counterparts in 2021. Our Royal Blue Growth and Value segments (mega caps) fought to a YTD draw (+25%).
Additional Factors
S&P 500: An Equal-Weighted Win
The Equal Weighted average catapulted ahead of the Cap Weighted measure in December to capture the annual crown for the first time since 2016. However, owning the “biggest of the big” proved to be the best play, yet again. The average return of the largest 25 firms in the index has beaten both the Cap- and Equal-Weighted measures each of the last seven years.
Earnings Momentum
With the second month of Q3-21 earnings in the books, our Up/Down ratio is 1.56. This “two-month” reading hovers just above the 38-year average of 1.53 and is the first “near normal” reading of 2021.
Small Cap vs. Mid Cap vs. Large Cap
On the back of some pretty atrocious Small Cap underperformance in November, our Ratio of Ratios posted its largest Small Cap discount since September of 2020.
Growth vs. Value vs. Cyclicals
The resurgence of Growth continues to be an uneven story, as the performance gap between Large and Small Caps widened. Results measured since the end of March: Royal Blue Growth +24%; Small Cap Growth -2%.
Additional Factors
The average return of the largest 25 firms ended the month flat. For the first time in 2021, this helped propel the Cap Weighted measure past the Equal Weighted average in the YTD race. The relative gain (+15.5%) enjoyed by the Equal Weighted index over the Cap Weighted measure from 8/31/20 to 5/28/21 has now been more than halved in the last six months.
Earnings Momentum
With the first month of Q3-21 earnings in the books, our Up/Down ratio reads 2.70. While that falls into the 95th percentile of our 38-year history, it is a far cry from our scale-busting “one-month” figure from July (4.52).
Small Cap vs Mid Cap vs Large Cap
Our Ratio of Ratios’ preferred habitat for the last five months has been a Small Cap discount of 18%-21%. We’re surprised it hasn’t broken even lower as the S&P 500 had a price return of +9.5% over that period compared to +1.2% for the Russell 2000.
Growth vs Value vs Cyclicals
Total returns since the end of March: Royal Blue Growth +24%; Small Cap Growth +3%. Small Cap Value continues to be the only style-box that is undervalued compared to its history.
Additional Factors
Tesla zoomed 44% higher in October and became the newest firm to reach $1 trillion in market cap. Tesla is now valued at 6.25x the combined weight of Ford and General Motors even though the young upstart sports just one-third of either’s revenue. TSLA and MSFT contributed one-fourth of the S&P 500’s 7% October gain.
Earnings Momentum
With the final month of Q2-21 earnings in the books, our Up/Down ratio reads 1.96. Divot repair should receive most of the credit for our outstanding 2021 figures as the comparisons were some of the darkest days in our economic history.
Small Cap vs Mid Cap vs Large Cap
Using non-normalized trailing operating earnings, Small Caps are selling at an 18% valuation discount to Large Caps. Our Ratio of Ratios has spent the last four months in a very tight range—fluctuating between an 18-21% Small Cap discount.
Growth vs Value vs Cyclicals
The revival of the Growth trade has been uneven over the last six months: Royal Blue Growth +16.5%; Small Cap Growth -2.0%. Small Cap Value continues to be the only style-box that is undervalued compared to its history.
Additional Factors
The streak of consecutive positive quarters for the S&P 500 would have been shattered had it not been for our current 4%-Club members. Apple, Microsoft, and Google contributed a combined +75 bps of performance in Q3, while the index’s other 500 or so deadbeat members generated -17 bps.
Earnings Momentum
With the second month of Q2-21 earnings in the books, our Up/Down ratio reads 2.03. This is inline with past YOY earnings-cycle highs but somewhat of a disappointment given the record “one-month” figure for July results.
Small Cap vs Mid Cap vs Large Cap
Using non-normalized trailing operating earnings, Small Caps are selling at a 21% valuation discount to Large Caps. The relative underperformance of Small Cap stocks continues to push our Ratio of Ratios lower: Over the last six months, the S&P 500 has outperformed the Russell 2000 by almost 16%.
Growth vs Value vs Cyclicals
Large Cap Growth continued its streak of outperformance over Value (and everything else). This Growth/Value dynamic has been much more muted in Mid and Small Caps.
Additional Factors
The S&P 500’s stunning recovery off the COVID-panic market bottom hit another milestone in mid-August—a 100% price gain from its March 23, 2020 closing low. The quickest “double” from a bear-market low in the index’s history was still six- to seven-months slower than the “doubles” experienced by the Russell 2000, S&P 400, and the Nasdaq Composite.