The Last Shall Be First, And the First LastBy admin_45 in Blog
Today we want to cover 2 issues related to the ongoing dramatic style/sector rotations in US equities.
First, let’s update you on the same issues we raised in last night’s Markets section…
As with Monday, the broad market indices were little changed today. The Dow was up by 28 basis points, the S&P 500 by 3 bp, and the NASDAQ down by 4 bp.
But below that calm surface, Monday’s remarkable moves continued.
- The Russell 2000 gained 1.2%. Over the last 5 days this measure of US small cap performance is up 4.8%, almost double the S&P’s 2.5% advance.
- US large cap Financial stocks rose by 0.4% today. Over the last 5 days they are 5.0% higher, double the S&P return.
- Momentum stocks, as measured by the MTUM ETF, were down 1.5% today. Their 5-day change is -1.0% and their performance YTD is now 18.9%, exactly the same as the S&P 500. Quite the fall from grace for a strategy that was up 23% YTD as of last Thursday.
- Min vol stocks, as measured by the USMV ETF, were down 0.8% today. These have treaded water over the last 5 days (-0.3%) and still show a 21.4% YTD gain.
We’re sticking to our explanation of these moves: markets are less convinced of a 2020 recession now than at August month-end due to renewed US-China trade talks. Proof point of that: 10-year US Treasury yields spiked today to 1.74%, the highest level since August 10th. That confidence helps Financials and Small Caps, but forces investors to sell down recent winners like Momentum and Min Vol names.
Now, on to topic #2: the current state of Growth vs. Value investing, an issue with clear ties to the prior point. Here’s where things stand today:
- Large Cap (S&P 500) Growth: +1.1% over the last 5 days, +20.0% YTD
- Large Cap Value: +4.3% over the last 5 days, +18.4% YTD
- Small Cap (Russell 2000) Growth: +3.1% over the last 5 days, +17.5% YTD
- Small Cap Value: +6.9% over the last 5 days, +12.1% YTD
Takeaway: the market’s dramatic rotation in recent days has closed much of the 2019 Growth/Value performance gap for large caps (just 1.6 points now) but there is still a sizeable YTD differential in small caps (5.6 points).
Now, Value style bulls will argue that their stocks are finally playing catch-up after 5 years of dreadful underperformance to Growth, so let’s look at exactly what’s in the Value indices to assess the investment case for further gains:
S&P 500 Value:
- Financials: 22% (13% neutral weight in the S&P 500)
- Technology: 16% (22% neutral weight)
- Healthcare: 10% (14% neutral weight)
- Industrials/Consumer Staples 10% each (9%/7% neutral respectively)
- Top 5 weightings: Apple (8.1%, 3.8% neutral), JP Morgan (3.2%, 1.5% neutral), AT&T (2.3%, 1.1% neutral), Bank of America (2.2%, 1.0% neutral), and Chevron (2.0%, 0.9% neutral)
Russell 2000 Value:
- Financials: 30% (18% neutral weight)
- Industrials: 13% (16% neutral weight)
- Real Estate: 11% (8% neutral weight)
- Consumer Cyclicals: 10% (11% neutral)
- Technology: 9% (14% neutral)
- No holding is +40 bp of the portfolio, so there is little concentration risk here
Bottom line: Value is all about Financials, with overweights no active portfolio manager would dare to take. These positions also explain a piece of why large cap Value has almost caught up to Growth but small cap Value has not:
- Large Cap Financials have beaten the S&P over the last 5 days, as noted earlier.
- Small Cap Financials are only up 3.9% in the last week, lagging the Russell 2000’s 4.8% advance.
Final thought: as much as we love a good cyclical rotation story, the major “Value” indices are too concentrated in Financials to make them investable in our book. This is one area where a good active manager is worth paying for, and if you are inclined to think Value will now beat Growth then this is the way to express that view.