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

Our Royal Blue Growth segment was far and away the worst performing style box in February (again). That once-powerhouse segment has already lost 16.3% YTD. In the last 18 months, Small Cap Value has almost entirely erased Small Cap Growth’s last five years of outperformance.

The Russell 2000’s 4% outperformance over the S&P 500 in February narrowed the discount back to its 12-month average.

Our Up/Down ratio is 1.54—the second consecutive “two-month” figure coming in right at the long-term average. This vignette’s message remains consistent: For earnings growth, the boom-time off of pandemic lows has come to an end.

It’s probably about high time that we check in with our past and present members of the esteemed 4% Club. 

It’s probably about high time that we check in with our past and present members of the esteemed 4% Club. For those of you not familiar with this vignette: back in the day, achieving a 4% weight in the S&P 500 had been a rare feat, occurring only during periods of extreme enthusiasm for technology, conglomerates or oil. The blessing of membership soon turned into a curse, with most taking just a cup of coffee behind the velvet ropes before being thrown to the curb because of dramatic underperformance to the rest of the Index. Our two most recent inductees seem to be following the proper established Club protocol for not lingering at the party too long. The two other members, however, have been receiving their mail at the Club for quite some time.

With a price decline of -5.2%, the S&P 500 suffered its worst month since March 2020. The carnage would have been much more severe (and downside estimates more rosy) had it not bounced +4.4% in the last two trading days.

For a brief period during the January 24th trading day, the S&P 500 was down 12% from the all-time closing high it set just three weeks earlier. The index went on to halve those losses and mask the carnage experienced by the small cap and growth subsets. Big Oil and Big Banks came to the rescue in our Equal-Weighted mega cap basket.

The monthly performance gap between Royal Blue Value (+1.9%) and Royal Blue Growth (-11.8%) is the largest we’ve seen since 2009.

This is the fourth consecutive month with a Small Cap discount greater than 20% for our Ratio of Ratios. The Small Cap discount had narrowed to as little as 8% last March, but since then, the S&P 500 has gained 13% (price only), while the Russell 2000 has lost 8%.

With the first month of Q4-21 earnings in the books, our Up/Down ratio is 1.86. This is just a tick below the long-term “one-month” average. The ultra-soft 2020 lookbacks are a thing of the past; building on 2021 earnings figures will prove to be a much more formidable task.

In a reversal of 2020, Small- and Mid-Cap Value dominated their Growth counterparts in 2021. Our Royal Blue Growth and Value segments (mega caps) fought to a YTD draw (+25%).

This reading marks the widest Small Cap discount of the last 18 months. We seem primed, once again, for Small Cap outperformance in 2022 based on our Ratio of Ratios. However, that process may be grinding and long.

With the final month of Q3-21 earnings in the books, our Up/Down ratio is 1.52. This “average” figure for Q3 seems a little too “late cycle” given the outsized earnings, sales, and margin rates.

The S&P 500 closed out 2021 with a solid +4.4% monthly price gain. For the year, it clobbered all other indexes—foreign and domestic—with a +27% jump.

It’s once again that time of year for what our founder deemed the great “thermal pollution.” Market pundits and prognosticators will divine, guess, and predict all that the market will bring in the new year.

October and November’s readings both signal that monetary stimulus is now doing more harm than good. The Fed policy pivot from supporting the labor market to fighting inflation has begun. Gains in consumer prices have resulted in a headline CPI value not expected until the middle of 2024 under the pre-pandemic trend.

The average return of the largest 25 firms ended the month flat. For the first time in 2021, this helped propel the Cap Weighted measure past the Equal Weighted average in the YTD race. The relative gain (+15.5%) enjoyed by the Equal Weighted index over the Cap Weighted measure from 8/31/20 to 5/28/21 has now been more than halved in the last six months.

The resurgence of Growth continues to be an uneven story, as the performance gap between Large and Small Caps widened. Results measured since the end of March: Royal Blue Growth +24%; Small Cap Growth -2%.

On the back of some pretty atrocious Small Cap underperformance in November, our Ratio of Ratios posted its largest Small Cap discount since September of 2020.