Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
Earnings Momentum
With the second month of Q1-2020 earnings in the books, our Up/Down ratio reads 0.75. This is only the seventh reading we’ve recorded below 1.0 in 145 quarters of our Up/Down history.
Small Cap vs Mid Cap vs Large Cap
Two consecutive months of outperformance for Small Caps has helped lift our Ratio of Ratios off its contemporary low. During the last two months, the absolute trailing P/E ratio has jumped from 11.6x to 15.9x for Small Caps, and from 18.1x to 22.5x for Large Caps.
Growth vs Value vs Cyclicals
Our Royal Blue Growth segment ended May with a 7% YTD gain. In just the first five months of 2020, that grouping has outperformed Royal Blue Value by nearly 21%.
Additional Factors
With the S&P 500 now within spitting distance of breaking even year-to-date, we seem to be witnessing an illusion worthy of David Copperfield. From the market’s perspective, the problems that were very much right in front of us during the limit down days of March seemed to have vanished into thin air.
Earnings Momentum
With the first month of 2020 earnings in the books, our Up/Down ratio starts Q1 at 0.72. This miserable figure was expected, but seeing it graphically, in the same ballpark as the great recession, reminds us of the gravity of the current economic situation. And the worst is yet to come!
Small Cap vs Mid Cap vs Large Cap
To look at this relationship another way, our trailing Small Cap P/E (13.9x) is in the 24th percentile of observations from 1983-present. Large Caps (20.8x) are in the 86th percentile.
Growth vs Value vs Cyclicals
Our Royal Blue Growth segment ended the month of April with a 0.3% YTD gain. That hardly seems fair given the economic calamity/uncertainty.
Additional Factors
April was a month of plummeting payrolls, eviscerated earnings, and crashing commodities—some of the worst data since the 1930s. It was also the best month of performance for the S&P 500 since January 1987 and it helped lower the YTD loss to the single digits. The punishment, it would seem, doesn’t fit the crime.
Earnings Momentum
Our final Up/Down reading for Q4 stands at 1.18. This is the highest “three-month” number for 2019, a year of earnings that never escaped the shadow of 2018. With the 2016-19 earnings cycle over, we now brace for the coming plunge.
Small Cap vs Mid Cap vs Large Cap
In March, the S&P 500 outperformed the Russell 2000 by a shocking 9.4%. Our Ratio of Ratios is now tickling its 40-year lows, last seen during the Tech Bubble.
Growth vs Value vs Cyclicals
The leadership regime has not been overthrown in this downturn. Large Cap Growth stocks (particularly Tech) have held up relatively very well, widening already huge performance gaps with other styles. Total returns since 2017: Royal Blue Growth +58%; Small Cap Value -26%.
Additional Factors
Microsoft and Amazon, the #1 and #3 firms by weight, somehow managed to post a positive return for the quarter. The other Tech Titans all posted results better than the overall index—increasing the Top 5 firms’ S&P 500 weight from 16.8% to 19.5% in Q1. This is easily a new record for our 1990-present data set.
Earnings Momentum
As we roll in the second month of Q4 earnings, our Up/Down Ratio reads 1.31. While still below average, this is the highest “two-month” figure for 2019 earnings. Our 2018 lookback hurdles are not what they used to be.
Small Cap vs Mid Cap vs Large Cap
Our Ratio of Ratios now sits near the lows experienced last summer. More interesting though, our Small Cap trailing P/E ratio is at its lowest absolute level (16.1x) since May of 2012.
Growth vs Value vs Cyclicals
Russell 2000 Small Cap Value is the worst performing style box YTD, down 15%. Its underperformance is nothing new, returning -2% since the start of 2017.
Additional Factors
It took just the last week of February to wipe out the gains of the last four months, as investors fretted about a virus causing a ruinous financial contagion. The invitations for the Bull’s 11th birthday party had already gone out—maybe market participants will be gathering for a wake instead?
Earnings Momentum
Our Up/Down Ratio reads 1.52. This figure is inline with the first three “one-month” readings of 2019, but remains well below the historical average. We’re still two months away from escaping the long shadow of the 2018 earnings bonanza.
Small Cap vs Mid Cap vs Large Cap
Another month of Large Cap outperformance helped push our Ratio of Ratios back down to a level we haven’t seen since last summer. Since going decidedly into the Small Cap discount zone at the end of last March, the S&P 500 has outperformed the Russell 2000 by 10%.
Growth vs Value vs Cyclicals
January’s outperformance gap (6%) between Royal Blue Growth versus Royal Blue Value was the largest in four years. After showing signs of life in late 2019, the Value-comeback story seems all but dead.
Additional Factors
January’s minuscule loss could have been worse if GAMA (Google/Amazon/Microsoft/Apple) hadn’t continued its incredible run. The single-digit gains from those four names, now 16% of the S&P 500 market cap, buoyed the index by a little over 1%.
Earnings Momentum
Our Up/Down Ratio reads 1.07—matching the lows of the 2015-16 earnings recession. It’s a bleak picture but, at the very least, firms have maintained their elevated earnings levels of 2019.
Small Cap vs Mid Cap vs Large Cap
After a handful of years dancing around the long-term average, our Ratio of Ratios got off the fence in 2019. The current gap in valuation has been driven by performance; 2019 became the third consecutive year of small cap underperformance.
Growth vs Value vs Cyclicals
Those institutionally-loved Large Cap stocks—our Royal Blue Growth and Value indexes—were both up 35% in 2019. Another sign of the affection for these stocks is showing up in their deviation from historical valuations.
Additional Factors
The S&P 500 plowed through the dour narratives of 2019 and came within spitting distance of its best yearly performance since the Tech Bubble. Microsoft and Apple, a combined 9.1% of the index’s market cap, punched above their enormous weights and contributed +15% of 2019’s total return.
Earnings Momentum
As we roll in the second month of Q3 2019 earnings, our Up/Down Ratio reads 1.08. Another brow furrowing bad number as we slog through the 2019 earnings-growth hangover.
Small Cap vs Mid Cap vs Large Cap
A third consecutive month of modest outperformance by Small Caps has lifted our Ratio of Ratios from a contemporary extreme registered at the end of August.
Risk Aversion Index: Stayed On “Lower Risk” Signal
While recession and election risks will dominate in the intermediate term, the overall near-term setting is still positive for risky assets. We maintain our favorable view toward credit.
Growth vs Value vs Cyclicals
Since the end of August: Royal Blue Growth +2.2%; Royal Blue Value +14.4%. Our proprietary Large Cap Value Index has now bested Growth in YTD performance.
Additional Factors
Steady incremental gains and only a few very mild setbacks brought the S&P 500 to a fresh all-time high. Fear seemed to leave the market completely as the Volatility Index dipped below 12 for the first time since October 3, 2018… a severe market correction followed shortly thereafter.
Earnings Momentum
Our first month of Q3 2019 earnings has our Up/Down Ratio reading at 1.37. This well below average figure is easily the lowest “one-month” number of our 2019 YOY earnings hangover.
Small Cap vs Mid Cap vs Large Cap
A second month of modest outperformance by the Small Caps has helped lift our Ratio of Ratios from the extreme 23% discount registered at the end of August. If recession fears remain muted, we’d expect this vignette to continue to march toward its long-term normalcy.
Growth vs Value vs Cyclicals
After ten quarters of underperformance, the sun is shining on Large Cap Value. Since the end of August: Royal Blue Growth -0.4%; Royal Blue Value +9.2%.
Additional Factors
Our favorite Cupertino-based tech firm is on a roll. Over the past two months, Apple has gained 19.1% and added $160 billion to its market valuation (that’s one Citigroup or two Caterpillars). This advance has propelled Apple back into the exalted 4% club (market cap within S&P 500), joining Microsoft with a similar $1.1 trillion valuation.
Earnings Momentum
As we roll-in the final month of Q2 earnings, our Up/Down Ratio reads only 1.11. This quarter’s figure was looking back to the best period of the 2018 earnings bonanza (2.06 ratio in Q218).
Small Cap vs Mid Cap vs Large Cap
Modest outperformance from the Small Caps helped pull our Ratio of Ratios out of its recent nosedive. Still, this vignette sits at 18-year lows, and there’s no guarantee that the relative valuation plunge in Small Caps won’t resume.
Growth vs Value vs Cyclicals
Our Royal Blue Value segment surged in September and ended ten consecutive quarters of underperformance to Royal Blue Growth. Since the start of 2017: Royal Blue Growth +64.9%; Small Cap Value +5.9%.
Additional Factors
The weather vane on top of the S&P 500 swung violently in September. A sudden preference for Value stocks (not just low volatility) over Growth was intertwined with a dramatic crash in the Momentum factor. Similarly, the Equal Weighted Average, which had been steadily losing ground to the Cap Weighted measure, snapped back and almost pulled even in YTD performance.
Earnings Momentum
Depending on one’s preferred earnings measurement (operational, reported, GAAP, non-GAAP), YOY earnings growth for Q2 will be zero or, at best, the very low single-digits.
Small Cap vs Mid Cap vs Large Cap
Another month of Small Cap underperformance has sent our Ratio of Ratios to a new contemporary low. Looking back to the late 1990s as a guide, a divergence in valuations can persist for several years.
Growth vs Value vs Cyclicals
Our Royal Blue Growth stocks shined with a 2.2% August gain as the rest of the segments faltered. Since the start of 2017: Royal Blue Growth +67.6%; Small Cap Value +0.75%.