Author: mgyurcsik

Is it Value’s Turn?

This week we examine factor performance from the Russell 1000, with a focus on the dynamic between growth and value stocks. For the month of July, value finally pulled ahead of growth as a contributor to performance. This is a shift from recent behavior as growth leads on a trailing 7-year basis. Typically, growth and value have operated in a cyclical relationship so value’s shift from detractor in 2Q to a positive contributor in July could signal a reversal in relative performance between the two styles.

Financials, particularly banks, did well in July by posting strong earnings; these tend to be value stocks and contributed to the relative outperformance. While tech has been a very strong performer year to date, some of the FANG stocks, namely Facebook and Netflix, hit potholes in July. Facebook encountered more trust and brand issues surrounding privacy and Netflix battled disappointing subscriber growth. These specific company pullbacks likely hurt the growth factor.

Growth has outperformed value since 2011 and the rolling 10-year outperformance is at a high point, now bumping up against two standard deviations from its long-term average. This paired with value’s recent edge above growth may indicate that growth’s outperformance versus value could be coming to an end.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

What Do Higher Interest Rates Mean for Higher Yielding Equity Sectors?

It looks like interest rates will dominate both fixed income and equity markets in 2018. Potentially higher interest rates have not only negatively affected bond markets, but have also wreaked havoc in certain sectors of the equity markets. Particularly hard hit:

  • Consumer Staples, down 7.1%;
  • Telecom, down 7.0%;
  • Real Estate, down 6.7%, and
  • Utilities, down 4.7 %.

Predictably, these are the worst performing sectors in the S&P 500 through April 13, 2018. The S&P 500 was down 0.1% over the same period.

Given the stubbornly low interest rate environment after the Global Financial Crisis, investment firms created a plethora of high dividend indices and strategies to respond to the world’s demand for yield. Investors who were not comfortable taking a bet on long duration bonds often invested in high dividend yield strategies to capture yield premiums over the 10-year bond and S&P 500. After a few years, high yielding sectors were often among the best performers in the market. For instance, in 2014 the Telecom sector returned 29.0%, trouncing the return of every other sector and the S&P 500 index.

Dividend-oriented ETFs saw $40B in net inflows which was in stark contrast to equities which have seen outflows over the same time period. However, there have been periods of outflows, namely during the Taper Tantrum in the summer of 2013 and in December 2015 after the Fed’s first interest rate hike.

However, the interest rate outlook is very different today versus three years ago. The global economy is strong and the U.S. is embarking on an interest rate normalization process. Since year-end, the yield on the 10-year bond increased 0.4% from 2.4% to 2.8% and the S&P 500 Dividend Aristocrats index, a proxy for high yielding stocks, yields 2.5%, which is lower than the yield on bonds. As fixed income’s yield prospects have improved, the interest in bond-proxy sectors has waned and investors are starting to withdraw assets. Although outflows are not as extreme as in December 2015, the return prospects of bond-proxy sectors could be challenged further as rates continue to rise.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Are Equities Oversold?

After an extended period of historically low volatility and steady gains in U.S. equity markets, the first significant pullback for U.S. equities since February 2016 has transpired over the last week. Through February 8th, the DJIA and S&P 500 each traded below their January 26th all-time closing highs by 10.4% and 9.7%, respectively. In 2017 the DJIA posted a record 71 new closing highs while the S&P 500 notched 62 new closing highs, its second highest in history. The upward trend continued into January 2018 with both DJIA and S&P continuing to record 11 and 14 additional new closing highs.

With the sharp return of volatility to a bull market that is already long in duration, investors are rightfully feeling a bit jittery right about now. The catalyst for the recent sell-off began with last week’s employment report showing faster than expected wage growth. This created concern that inflation could rise faster than expected. Under this scenario, the Fed would be forced to raise short-term rates at a quicker pace than what is currently being priced into the market. Only time will tell if this was simply a long overdue pullback as part of a normally functioning market, or the start of further price deterioration. While the bull market is long by historical standards and valuations are near the upper end of their historical ranges, economic and corporate fundamentals do not appear to signal warning signs. With such uncertainty, it can be helpful to look towards technical signals for clues.

This week’s chart looks at a popular technical indicator, the Relative Strength Index (RSI). This indicator measures the degree of recent gains and losses for a security or index over a specified period, typically 14 days, to identify overbought or oversold conditions. Its calculation captures both the speed and magnitude of price movements. RSI values range between 0 and 100, however RSI values of 70 or above are generally considered overbought and likely to experience a trend reversal. Likewise, RSI values of 30 or below are generally considered oversold and likely to experience a trend reversal to the upside. RSI values can remain in overbought or oversold territory for extended periods of time, so it is not until that value crosses these threshold levels again that a bottom or top is considered as being potentially formed. At the January 26th close, the DJIA’s RSI measured 88.7 and had been in overbought territory since late 2017. With the recent pullback, the DJIA’s RSI quickly dropped to 29.5 as of February 5th. The following three trading days produced large price swings, but ultimately these indices have continued to trade lower. Currently at 30.4, RSI for the DJIA is thus far holding above the oversold threshold. While a technically oversold level may foreshadow a future potential uptrend, investors should not place too much weight on any one indicator.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Is the Federal Reserve Poised to Turn Hawkish?

As America’s central bank, the Federal Reserve is tasked with the important power of keeping our nation’s employment and inflation within a range that is conducive to prosperity. The Fed does this by controlling interest rates. By keeping interest rates low, the Fed enables businesses to borrow more easily, thereby increasing employment, but at the risk of raising inflation to levels that could be too high. In Fed-speak, the Fed is being dovish when it keeps rates low to stimulate the economy — stepping on the gas versus pumping the brakes. On the other hand, if the Fed raises interest rates, it is harder for businesses to borrow, thereby containing inflation, but at the risk of raising unemployment. In this case, the Fed is hawkish when it raises rates to rein in the economy — pumping the brakes.

This week’s chart looks at the dovishness or hawkishness of the Federal Open Market Committee, the committee within the Federal Reserve that sets interest rates. The committee is going through much change: Jerome Powell — a dove — was recently nominated by Trump to Fed Chair starting in 2018 and was affirmed by the Senate. Janet Yellen — a dove — will be stepping down as Fed Chair at the end of this year. Randal Quarles — a centrist — recently joined the committee.

The Fed publishes the committee’s membership for each of the next three years. By assessing the recent speeches and papers from each member, we constructed a Dove-O-Meter to show how dovish or hawkish the group is expected to be. It is important to note that the Fed board of governors, which comprises a large portion of the Federal Open Market Committee, will have four empty seats out of seven total once Yellen steps down, so there may be some change to the dovishness or hawkishness of the group as Trump continues to nominate more people. However, with the members that we know will be on the committee, we can expect a relatively centrist Fed in 2018 and a relatively dovish Fed in 2019 and 2020, as shown in the chart. A centrist Fed in 2018 may be more balanced in normalizing rates and its balance sheet, while a dovish Fed in 2019 and 2020 may lean towards hiking rates less and trimming its balance sheet less to continue to be more stimulative.

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2017 Investment Symposium Briefing

A quick recap of the 2017 Investment Symposium — from CEO Brian Wrubel’s opening remarks to the keynotes and flash talks. This year’s symposium covered the current market environment, emerging investment themes and investment stewardship challenges in the year ahead. Our flash talk format is designed to brief clients on pressing topics and encourage timely conversations with investment consultants.

Full keynote and flash talk videos available on demand:

Retail Therapy: The Amazon Effect


Flash talk by Jeremy Zirin, CAIA, at Marquette’s 2017 Investment Symposium

Amazon and e-commerce have reshaped the retail landscape. From the “death of the mall” to online shopping to personalized shopping experiences using technology, the headlines all seem to declare doom and gloom. But is change a good thing? Will brick and mortar actually ever be totally replaced? What companies and industries are benefitting from the disruption?

U.S. vs. Non-U.S. Equity Allocation: Does Parity Make Sense?


Flash talk by David Hernandez, CFA, at Marquette’s 2017 Investment Symposium

In this session, we cover U.S. vs. non-U.S. equity allocation. Starting with the basics in determining an equity allocation, we examine both the historical and projected risk/return analysis for U.S. and non-U.S. equity. What are different types of investors doing with their equity allocations? How does diversification improve the risk/return profile? Are we nearing the end of the U.S. outperformance cycle?

 

 

Will the Fed “Normalize” My Investment Returns?


Flash talk by Ben Mohr, CFA at Marquette’s 2017 Investment Symposium

In this session, we review common terms and concepts in fixed income including Fed rate hikes and the Fed’s balance sheet, and explore how each concept can assist investors in modeling bond returns. We also examine potential outcomes of the upcoming change in Fed leadership and FOMC and impacts on client portfolios.