Topic Tags: U.S. Equity

2016 Market Preview

January 2016

Similar to previous years, we offer our annual market preview newsletter. Each year presents new challenges to our clients, and 2016 is off to a volatile start with equity markets down significantly, oil dropping below $30, the Fed poised to further increase interest rates, and fears of a China slowdown rippling through the markets. However, other headlines will emerge as the year goes on, and it is critical to understand how asset classes will react to each new development and what such reactions will mean to investors. The following articles contain insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered.

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How Much Longer Will Growth Outperform Value?

This week’s Chart of the Week examines the relative performance of growth versus value. The above chart shows the price level of the Russell 3000 Growth index relative to the Russell 3000 Value index. Growth is outperforming value when the line is in an uptrend and value is outperforming growth when the line is trending downward.

This week’s Chart of the Week examines the relative performance of growth versus value. The above chart shows the price level of the Russell 3000 Growth index relative to the Russell 3000 Value index. Growth is outperforming value when the line is in an uptrend and value is outperforming growth when the line is trending downward.

Investors may have noticed the recent outperformance of growth versus value year-to-date across small-, mid-, and large-cap. When viewed over a longer time horizon though, growth has outperformed value for almost ten years. The outperformance of growth prior to the tech bubble was much greater in magnitude; however, the current multi-year period of growth outperformance is the longest since the early 1980s.

One explanation for the current leadership of growth over value may simply be how these indices are constructed. Value indices feature a much larger allocation to the Financial and Energy sectors (representing approximately 43% of the Russell 3000 Value index as of 9/30/2015). When examining performance since the October 2007 market peak, Financials and Energy have lagged other sectors, posting cumulative returns of -20.8% and +3.1%, respectively. Areas such as Technology, Health Care, and Consumer Discretionary are among the best performing sectors since the October 2007 market peak and carry higher weightings within growth indices.

Over the long term, there will be periods when value is in favor and periods when growth is in favor. The duration of the current growth cycle calls into question how much longer growth’s outperformance will persist. Ultimately, it is extremely difficult to predict when the relative performance will shift, and yet another reminder that it is imperative to be diversified across the various size and style boxes of the U.S. equity market.

Are Retail Stocks on Sale?

Historically, the retail industry, a subset of the consumer discretionary sector, experiences an upswing during the winter months as holiday sales alone contribute 19% to yearly sales and Q4 earnings are generally released within the beginning of Q1. Highlighted in red is the November through February performance of the S&P Retail Select Industry Index; recession years aside, this upward trend usually holds.

Historically, the retail industry, a subset of the consumer discretionary sector, experiences an upswing during the winter months as holiday sales alone contribute 19% to yearly sales and Q4 earnings are generally released within the beginning of Q1. Highlighted in red is the November through February performance of the S&P Retail Select Industry Index; recession years aside, this upward trend usually holds.

In 2015, retail sales are expected to grow year over year by 3.7% and though this is a slight decrease from 2014’s 4.1% increase, it is still substantially above the 2.5% ten-year average. The U.S. employment rate is at a recent high of 94.8% however the participation rate has decreased to 62.4%, meaning that although the workforce appears to be buzzing along, some previous members of the workforce may be choosing to opt-out of their job searches and thus are less likely to take out their AMEX cards.

Though U.S. economic stats may be a mixed (gift) basket, currently the P/E ratio of the referenced retail index is at 22.37, down almost 30% year over year, making the retail industry seem attractive, especially for this time of year. Additionally, consumer confidence is currently at 97.6, modestly above the 93.8 level seen one year ago, leaving the U.S. consumer poised to shop ’til they drop.

How Have Capital Market Valuations Evolved Over the Last Year?

This week’s chart shows that current valuations across equity and fixed income markets are lower today compared to where they stood at the end of September last year. The big takeaway here is that equities broadly appear to still be cheaper than bonds.

This week’s chart shows that current valuations across equity and fixed income markets are lower today compared to where they stood at the end of September last year. The big takeaway here is that equities broadly appear to still be cheaper than bonds.

Japanese Government Bonds and German Bunds are some of the most expensive debt instruments currently available to investors. As it relates to the former, the Bank of Japan’s unprecedented stimulus has helped push Japanese Government Bond yields to record lows, and earlier this year, yields on securities with maturities up to five years turned negative for the first time. Looking ahead, the Fed’s willingness to delay an increase in U.S. interest rates should support demand for riskier assets and as a result, fixed income valuations may normalize over time. Compared to last year, the most precipitous drop in valuations has taken place in U.S. High Yield, U.S. Credit and U.S. dollar-denominated Emerging Markets Debt.

As it relates to equities, with the exception of the U.S., South Africa, and Mexico, valuations around other parts of the globe are on the lower end of their historical averages.  Finally, valuations in Canadian, Spanish, and Taiwanese equity markets have come down the most over the past year as these markets have sold off over the near term.

Note: Percentile ranks show valuations of assets versus their historical ranges. Example: If an asset is in the 75th percentile, this means it trades at a valuation equal to or greater than 75% of its history. Valuation percentiles are based on an aggregation of standard valuation measures versus their long-term history.

The Apple Effect?

On Wednesday, September 9th Apple announced the details on its latest iteration of its flagship product – the iPhone. The iPhone 6S and 6SPlus will be the ninth major iPhone announcement since the iPhone 1 was first unveiled to the world on June 29th 2007 (excluding new storage space and color variations of the same model).

On Wednesday, September 9th, Apple announced the details on the latest iteration of its flagship product – the iPhone. The iPhone 6S and 6SPlus were the ninth major iPhone announcements since the iPhone 1 was first unveiled to the world on June 29th, 2007 (excluding new storage space and color variations of the same model). The announcement events are widely covered by the media and fans of one of the most innovative companies of the 21st Century.

This week’s chart examines the change in Apple’s stock price from the announcement through the following six days and comparing that change to the return of the S&P 500 over the same time periods. On average, Apple has outperformed the index by 2.62% over the past eight announcement dates.

The importance of this announcement can be seen in the S&P 500 holdings, of which Apple is the largest contributor with a 3.71% weight. While it cannot be said with utmost certainty that Apple will outperform the market with its latest product announcement, it is safe to assume that these products will continue to be a major revenue source for the company, drive movements in the stock price, and therefore have a significant influence on the return of the index.

It’s That Time of Year Again…

Between August 17th and 25th, the U.S. equity market – as represented by the S&P 500 Index – declined 11%. The pace and magnitude of the market drop came as a shock to many and left investors pondering how they should react to this swift downdraft. While some may be looking to underlying fundamentals or economic data for guidance, one could simply point to history as an indicator.

Between August 17th and 25th, the U.S. equity market — as represented by the S&P 500 Index — declined 11%. The pace and magnitude of the market drop came as a shock to many and left investors pondering how they should react to this swift downdraft. While some may be looking to underlying fundamentals or economic data for guidance, one could simply point to history as an indicator. This week’s chart looks at the maximum intra-year drawdown for the S&P 500 Index over the last 30 years.

While this recent decline is notable, it is not unusual for the market to experience a significant intra-year drawdown. Over the last 30 years, returns for the S&P 500 have only been negative five times. However, 15 of these 30 years have featured max intra-year drawdowns greater than 10%, with 10 of those years actually posting a gain for the year. In other words, the S&P 500 has shown resiliency over the long term, and the recent 12.4% drawdown for 2015 does not automatically translate to a negative year for U.S. equity investments. In fact, the last two days have seen an impressive rebound in the markets, and when markets closed on August 27th, the S&P 500 index was down only 2.1% for the year.

For more information on the recent market volatility as well as what to expect in the coming months, please read our U.S. equity market update which was released earlier this week.

U.S. Equity Market Update

August 2015 Investment Perspectives

Over the last week, the U.S. equity market – as represented by the S&P 500 Index – declined 11% between August 17th and 25th. The pace and magnitude of the market drop have come as a shock to many and left investors pondering how they should react to this swift downdraft. The following article is intended to provide some perspective on the recent volatility as well as some guidance for our clients on how to respond to the recent sell-off.

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Creating Social Impact Through Responsible Investing

August 2015 Investment Perspectives

A growing population of socially conscious investors has energized socially responsible investment (SRI) strategies in the past decade. The Forum for Sustainable and Responsible Investment defines SRI as the process of integrating personal values and societal concerns into investment decision making. SRI has increased in the U.S. from $639 million in 1995 to $6.6 trillion in 2014. These assets account for roughly 17% of total dollars under management in the U.S.

This newsletter outlines a brief history of SRI, approaches to implementing an SRI program including positive and negative screening and shareholder activism; impact investing; example products and solutions in equities, fixed income, and real estate; investor concerns around performance and fiduciary liability, and considerations for implementing a sustainable investing program.

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Time to Buy U.S. Small-Cap Value Stocks?

Through the first seven months of 2015, growth stocks have far outpaced their value brethren in the U.S. equity market. While the theme has played out across all size sectors of the market, this trend has been most obvious for small-cap stocks.

Through the first seven months of 2015, growth stocks have far outpaced their value brethren in the U.S. equity market. While the theme has played out across all size sectors of the market, this trend has been most obvious for small-cap stocks. The Russell 2000 Growth index has returned 9.18% while the Russell 2000 Value index has dropped 2%. Given this disparity, it is worth examining whether now is an appropriate time to re-allocate to small-cap value stocks, since their recent struggles have driven prices lower. To help answer this question, we turn to a comparison of the current index price versus its 200-day average, a common valuation metric used to measure the relative value of a particular stock or index versus a longer-term average. As shown in the chart, the index dipped below its 200-day trading average in July and is now trading at a discount relative to its historic values.

From the broader perspective of portfolio construction, small-cap value stocks have historically offered upside potential and outperformance versus other style and size sectors in the U.S. equity market. In addition, since smaller companies’ operations tend to be more domestically focused, they could potentially provide a sanctuary from the rough geopolitical turmoil that is occurring in Europe and Asia. On a related note, the potential drag from a stronger U.S. Dollar would also be muted due to small-cap companies’ limited international exposure. Given the long-term benefits of small-cap value stocks along with the current valuation of the index, now may be an attractive opportunity to either rebalance or create exposure to the asset class.