Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
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%.
Additional Factors
Yields crashed, gold surged, and investors fawned over low-volatility dividend-paying stocks. The giant, deflation-breathing lizard that has plagued our friends in the Far East for the past three decades seemed like it was lurking just off our shores.
Earnings Momentum
For the first month of Q2 2019 earnings, our Up/Down Ratio reads 1.50. This below-average figure was expected as we continue to work through the rough comparisons from 2018.
Small Cap vs Mid Cap vs Large Cap
Just one year ago, this relationship registered a Large Cap premium of 12%. During the last twelve months, the S&P 500 gained 6% compared to a 6% loss in the Russell 2000 (price return only).
Growth vs Value vs Cyclicals
Mid Cap Growth Can’t Be Stopped
Additional Factors
Another record for the S&P 500! Stocks are doing great! Well... not so fast. We closed July with the S&P 500 +1.7% above its high set in the summer of 2018. Contrast that to the S&P 400 and Russell 2000 ending the month still -3.8% and -9.5%, respectively, below last year’s price highs.
Earnings Momentum
Our final Up/Down Ratio for Q1 reads 1.12—in line with the earnings recession of 2015-16. Things don’t get any easier for Q2 as those results will be compared to the highest—and final—Up/Down ratio (2.06) of the 2018 earnings bonanza.
Small Cap vs Mid Cap vs Large Cap
Things are starting to get very interesting in this vignette. A sharp move down into Large Cap premium territory is reminiscent of market action in the late 1990s.
Growth vs Value vs Cyclicals
And the nine previous quarters! In an amazing run, our Royal Blue Growth has now outperformed Royal Blue Value for ten consecutive quarters.
Additional Factors
The metaphysical guarantee of a July rate cut chased away the unpleasantness of the May sell-off. In June, the S&P 500 posted its best month since January, and revisited the all-time highs of April and September of last year. Gains were pervasive in June; Google posted the only monthly loss of the index’s largest 50 firms.
Earnings Momentum
Our Up/Down Ratio reads 1.13. This paltry figure is in line with the “two-month” figures registered during the earnings recession of 2015-2016.
Small Cap vs Mid Cap vs Large Cap
Our Ratio of Ratios continues to drill down into Small Cap discount territory that hasn’t been explored since the popping of the dot-com bubble. This vignette was registering a 12% Small Cap premium just eleven months ago.
Growth vs Value vs Cyclicals
Our institutionally-loved Royal Blue Growth stocks were the safe harbor in May; they declined “only” 4.8%. Since the start of 2017: Royal Blue Growth +50%; Royal Blue Value +13%.
Additional Factors
A heightening of the trade war coupled with a much more drastic inversion in the yield curve helped the S&P 500 slide lower in each of the four full weeks of May. The average return of the largest 25 firms in the index was buoyed by non-Tech firms for the first time in recent memory.
Earnings Momentum
Our Up/Down Ratio reads 1.52. As expected, the impossibly-high earnings growth rates of 2018 have reached from the grave to pull 2019’s figures down.
Small Cap vs Mid Cap vs Large Cap
Our Ratio of Ratios has now spent six consecutive months in the Small Cap discount zone—matching the duration of the only other contemporary discount streak set back in 2016.
Growth vs Value vs Cyclicals
What else is new, right? Growth has been a rocket ship to Value’s tricycle the past nine quarters. The valuation work has shown Growth stocks overvalued relative to Value for some time, but that doesn’t seem to be stopping the performance trend.
Additional Factors
In the span of 146 trading days, the index experienced a -20% trapdoor followed by a +25% rocket ship—bringing us right back to where we started. Microsoft has become the second firm in the S&P 500 to reach the $1 trillion market cap threshold.
Earnings Momentum
After four tremendous quarters of growth, Q4 2018’s final Up/Down Ratio reads 1.46—below our long- term average of 1.51. We expect even lower results in the quarters to come.
Small Cap vs Mid Cap vs Large Cap
This is the largest relative Small Cap/Large Cap discount we’ve tracked since June of 2003. After racking up some very good earnings, the absolute trailing P/E ratios for both market cap segments have come down significantly.
Growth vs Value vs Cyclicals
What else is new, right? Growth has been a rocket ship to Value’s tricycle the past nine quarters. The valuation work has shown Growth stocks overvalued relative to Value for some time, but that doesn’t seem to be stopping the performance trend.
Additional Factors
A steep nosedive followed by a roaring recovery. The index shrugged off an inverted yield curve in Q1. For now, the market prefers the narrative of the remedial powers of lower interest rates over the possibility of a slowing economy.
Earnings Momentum
Q4’s second month of earnings reports produced an Up/Down Ratio of 1.71. This is the lowest “two-month” figure of the past five quarters and, gasp… dangerously close to our long-term average.
Small Cap vs Mid Cap vs Large Cap
This is the fourth consecutive month that our Ratio of Ratios has resided in the Small Cap discount zone. Trailing P/E ratios have surged for Large Caps and Small Caps in the last two months.
Growth vs Value vs Cyclicals
Growth stocks reclaimed their dominant position over Value and now lead in every market cap breakdown YTD. Growth also looks overvalued compared to its own history and compared to Value stocks.
Additional Factors
The S&P 500 completed its best two month window of performance since the fall of 2010 and has leveled off at an interesting technical juncture—in line with the three false rallies of late 2018.
Earnings Momentum
Our first Up/Down Ratio for Q4 stands at 2.87. During the 2018 earnings bonanza, we’ve had a very wide range of stratospheric “one-month” readings (2.74 to 3.67).
Small Cap vs Mid Cap vs Large Cap
Our Ratio of Ratios normalized a bit in January. P/E expansion was a little more dramatic for Small Caps as the Russell 2000 posted its best monthly performance in eight years.
Growth vs Value vs Cyclicals
Our Deep Cyclical group, fresh off a -19% retreat in 2018, posted its best month of performance (+11.1%) since 2011.
Additional Factors
After narrowly avoiding the “official” bear market label in December, the S&P 500 turned in its best monthly return in more than four years. Those forgotten rank-and-file firms finally found their voices and produced the widest monthly performance gap between the Cap and Equal Weight measures in more than eight years.