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

In April, Small Caps took a break from their ascent toward the long-term median of the Ratio of Ratios. Trailing earnings’ profiles are now exclusively “pandemic.” A downward bias on absolute valuations should start to materialize in the coming months.

With the first month of 2021 earnings in the books, our Up/Down ratio reads 2.75. As expected, the base-effect helped kick the ratio into rarified air. This vignette should produce 2018-like figures through the end of calendar-year 2021.

While we’re still squeezing into our pants and fretting over our newest chin, the S&P 500’s three-largest firms have been shedding their COVID-weight gain at a measured pace for months. Whereas most people drop the pounds through vigorous activity, these firms have managed to slim down just by standing still.

Apple, down a seemingly benign 5% over the last seven months, has seen its S&P 500 weight shrink more than 20%, from 7.3% to 5.7%. We see the same story with Amazon. It has lagged the index by 25% since August and, as of March 31st, its 11-month membership in the 4% Club came to an end.

Small Value, easily the worst style-box since 2017, posted a 21% gain in the first quarter. Getting as far away from Large Cap Growth as possible continues to be the best strategy this year.

During the first quarter, the Russell 2000 (+12.7%) easily beat the S&P 500 (+6.2%) and the Small Cap discount within our L3000 universe shrank significantly, from 18% to 8%.

The final Up/Down ratio for Q4 reads 1.30. This ratio has been below its historical average for the past nine quarters, having trekked from the shadow of the 2018 earnings bonanza right into the pandemic. We expect the reading to be well above-average next month as hurdle rates are set to plummet.

The S&P 500 gained 4.2% in March. Again, as has been the case since last summer, improving underlying fundamentals have not been able to offset the rise in the index’s price.

The Core CPI numbers were slightly below estimates easing inflation fears. Inflation in the Energy complex has driven headline inflation to a one year high. Readings over the next few months will be distorted as we reach the anniversary of last spring’s collapse.

The sails have gone slack for the S&P 500’s Top-5 firms. Since the trend change at the end of August, the index has advanced 10%. As a group, the five Tech Titans have actually hindered performance during that span (-0.4% contribution).

As interest rates climb, the preference for Large Growth continues to flag. Our Royal Blue segment, the darling of 2020, is the only style box in negative territory YTD.​

The Russell 2000 has now outperformed the S&P 500 for six consecutive months. This vignette can still be used to make a relative valuation call for Small Caps over Large Caps, but the window seems to be closing quickly.

The Up/Down ratio reads 1.48. Given the change in our daily lives, it’s pretty amazing that we’re so close to a “normal” Up/Down ratio considering the pre-pandemic look-back period.

Durables have bounced back much stronger than non-durables while services have lagged. Inflation's reaction has been muted to these moves.

The Equal Weighted S&P 500 has clawed back most of its enormous return deficit. The one-year trailing return favored the Cap Weighted measure by +13.5% at the end of August—the widest rift since we exited the Great Recession. As of the end of January that gap had been whittled down to +3.5%.

Both of the Small Cap styles had a terrific start to 2021 as each gained +6.7%. Small Cap Growth is now the best-performing style box since the end of 2019 (+44%).

Our Ratio of Ratios has rocketed toward its historical median over the last two months. Over that time, the Russell 2000 (+14%) has absolutely trounced the S&P 500 (+3%). Buying Small Caps over Large on a relative valuation argument can still be made—but that window seems to be closing quickly.

As we kick-off Q4-20 earnings reports, our Up/Down ratio reads 2.19. We’re a bit surprised to have such a strong number given that the YOY look-back hurdle is pre-pandemic.

The S&P 500 had a monthly loss of 1% to start 2021. This moved our downside-to-median estimate just a tick under its contemporary extreme of -42%.