Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
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%.
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%.