Articles by Phil Segner, CFA Co-Portfolio Manager & Sr. Analyst

Our Ratio of Ratios ends 2022 at a two-and-a-half-year low. Like 2019, 2020, 2021, and 2022, Small Caps seem primed for outperformance in 2023. Some kind of economic turmoil (perhaps underway) is probably needed to jolt them back into favor.

Our Up/Down ratio ends the Q3-22 earnings season with a pitiful reading of 1.07—very near the previous two quarter’s “final readings.” This vignette hasn’t had much longer stretches at such low levels (outside the Financial Crisis). Perhaps a sign we’re in the latter innings of an EPS downturn?

Energy, Health Care, and Information Technology kick-off 2023 at top of our sector scores. Energy and Health Care have resided in the 1st and 2nd spots, respectively, for the last three months. Info Tech moved up from the 6th spot in October to 3rd this month. Consumer Discretionary, Real Estate, and Utilities are the lowest rated for the second consecutive month.

We update our annual exercise reviewing how the industry “Dreams” and “Nightmares” of the previous year (2021 in this case) fared in the ensuing year (2022), and conclude with the new year’s industry composition of the Dream and Nightmare portfolios based on 2022 performance.

Santa brought the S&P 500 a lump of coal in December 2022, as the index declined 5.9%. That move reversed November’s gain (and then some).

The S&P 500 ended November 14% higher than its contemporary low seven weeks earlier. Last month contained two of the three best trading days (+5.5% and +3.1%) since April 2020, as a mild consumer inflation reading and dovish Fed Chair comments buttressed hopes for a policy pivot.

In the last year, Royal Blue Value (+17%) has dominated Royal Blue Growth (-26%). That is almost a mirror image of the nine-month run for Growth between November 2019–September 2020: Royal Blue Growth +30%; Royal Blue Value -9%.

After a month of Small Cap underperformance versus Large Caps, our Ratio of Ratios has crashed through contemporary lows. On a relative basis, only the three months that followed the onset of the pandemic registered deeper discounts for Small Caps.

After a decent start with the Q3 “one-month” reading, the ratio is back down in familiar territory; every quarter this year has now registered a “two-month” reading between 1.04 and 1.08. Values in that range have always been associated with a recession.

The mid-October market bounce extended through November. The S&P 500’s monthly gain (+5.4%) stretched both of our downside-to-median estimates by congruent amounts. Since September 30th, downside for our “New Era” (1995-to-date) weighted average widened from -5% to -17%.

Lower than expected CPI figures give the Fed an opportunity to ease the pace of tightening. Markets, probably bracing for yet another higher than expected reading, shoot higher. Our Scorecard sees inflation’s downward trajectory continuing.

Value stocks have had incredible performance relative to Growth. At the end of October, IVE (iShares S&P 500 Value) had a 20% YTD advantage over IVW (iShares S&P 500 Growth). That’s easily the largest annual performance gap in favor of Value: Over the 22-year history of data, no other year reached double digits.

Our best-performing style box in October, Royal Blue Value (+14.2%), clawed its way into positive territory (+0.8%). All five of the other style boxes are trailing RB Value by 12-32% YTD.

Our Ratio of Ratios had a slight rebound from September’s contemporary lows. The October bounce was more pronounced in Small Caps, as that flavor of equities had its best monthly performance, relative to Large Caps, since February.

With the first month of Q3-22 earnings in the books, our Up/Down ratio is 1.42, which is markedly better than the first two quarters (1.09 each). However, given falling estimates, the latest uptick probably isn’t the start of something bigger.

With an 8% S&P 500 advance in October, our valuation measures bounced pretty hard off the contemporary lows. The estimate for downside to the median,1957-to-date, widened from -21% to -27%; while the “New Era” estimate (1995-to-date) worsened to -12% from -5% at the beginning of October. 

Read this week's Major Trend.

The S&P 500 pegged its third consecutive quarterly loss, a remarkable feat for the Index. It hadn’t produced back-to-back quarterly losses (total return) since the Great Financial Crisis. Investors opening their quarterly statements in the next week or so, accustomed to a sharp reversal of losses like those in 2011, 2015, 2019, and 2020 may be in for a surprise.

More pain for our Royal Blue Growth segment (Large Growth proxy). Q3 performance (-6.9%) was the worst for our style boxes and contrasted against the other Growth boxes (SC Growth +0.2%, MC Growth -0.6%).

This is the lowest relative valuation registered for Small Caps since May 2020. The end of September also marked the lowest absolute trailing valuations for both Large Caps (20.7x) and Small Caps (15.0x) in our L3000 universe looking back to April 2020.