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

This is the fourth consecutive month that our Ratio of Ratios has resided in the Small Cap discount zone. Trailing P/E ratios have surged for Large Caps and Small Caps in the last two months.

Q4’s second month of earnings reports produced an Up/Down Ratio of 1.71. This is the lowest “two-month” figure of the past five quarters and, gasp… dangerously close to our long-term average.

Currently, the collective intelligence of Wall Street is predicting 6% S&P 500 EPS growth in 2019. It’s also the 61-year average annual growth rate for the index, so how wrong could it be?

After narrowly avoiding the “official” bear market label in December, the S&P 500 turned in its best monthly return in more than four years. Those forgotten rank-and-file firms finally found their voices and produced the widest monthly performance gap between the Cap and Equal Weight measures in more than eight years.

Our Deep Cyclical group, fresh off a -19% retreat in 2018, posted its best month of performance (+11.1%) since 2011.

Our Ratio of Ratios normalized a bit in January. P/E expansion was a little more dramatic for Small Caps as the Russell 2000 posted its best monthly performance in eight years.

Our first Up/Down Ratio for Q4 stands at 2.87. During the 2018 earnings bonanza, we’ve had a very wide range of stratospheric “one-month” readings (2.74 to 3.67).

Alas, December’s cheaper valuations may have only been temporary.

There was a lot less Christmas cheer with the market down 15% through Christmas Eve. The S&P 500 was propped up by a few big firms in 2018. Our 25-Largest firm average ended the year in positive territory and bested the Equal Weighted Average by almost 11%.

Our tech-heavy Royal Blue Growth segment faltered toward the end of the year but held up better than any other segment in a rough 2018.

This is the farthest our Ratio of Ratios has dipped into the Small Cap P/E discount zone since 2003.

With Q3 earnings season complete, our Up/Down Ratio stands at 1.85. We’re now left with one quarter of the sweet 2018 vintage to report—but take note of the tough YOY comparison on deck.

December’s 9% drop in the S&P 500 made this vignette a lot more interesting.

Lower oil prices are dragging down the headline number. Markets are urging the Fed to take a pause in hiking. Core inflation remains in a healthy, tight range. Wealth effect concerns may drag on future price increases.

An eleventh hour surge in equity prices salvaged a positive month for the S&P 500.

Since the latest trouble began on October 10th, the S&P 500 has experienced gains or losses in excess of 1% in 20 of the 39 trading days. Prior to October 10th, we saw only eight such days during the six month “melt up.” The Equal Weighted Average broke a four-month relative-performance losing streak to the Cap Weighted measure. Over the past 24 months: Cap Weighted +25.5%; Equal Weighted +18.4%.

Our tech-heavy Royal Blue Growth segment underperformed for the second month in a row. Despite these rare missteps, the group still has a solid YTD return of +8.7%.

Small Caps are selling at a 2% valuation discount to Large Caps. Our Ratio of Ratios moved into the Small Cap P/E discount zone for the first time in 15 months.

Our second Up/Down Ratio of Q3 stands at 1.88—this is the weakest “two-month” reading we’ve seen in the last four quarters. The energy selloff has us thinking about the up/down struggles of the 2014-15 Energy-sector earnings washout.

After pulling the load for so long, the much loved FAANG stocks proved to be a liability for the index. Coming into the month, the FAANGs accounted for 12.8% of S&P 500 market cap. When October was through, the five firms made up 20% of the losses, wiping out a collective $330 billion (one XOM) in market cap.