Stock Market Internals Earnings Momentum, Small/Mid/Large Caps, Growth/Value/Cyclicals, and Additional Factors
Earnings Momentum
As we roll in the second month of Q3 2019 earnings, our Up/Down Ratio reads 1.08. Another brow furrowing bad number as we slog through the 2019 earnings-growth hangover.
Small Cap vs Mid Cap vs Large Cap
A third consecutive month of modest outperformance by Small Caps has lifted our Ratio of Ratios from a contemporary extreme registered at the end of August.
Risk Aversion Index: Stayed On “Lower Risk” Signal
While recession and election risks will dominate in the intermediate term, the overall near-term setting is still positive for risky assets. We maintain our favorable view toward credit.
Growth vs Value vs Cyclicals
Since the end of August: Royal Blue Growth +2.2%; Royal Blue Value +14.4%. Our proprietary Large Cap Value Index has now bested Growth in YTD performance.
Additional Factors
Steady incremental gains and only a few very mild setbacks brought the S&P 500 to a fresh all-time high. Fear seemed to leave the market completely as the Volatility Index dipped below 12 for the first time since October 3, 2018… a severe market correction followed shortly thereafter.
Earnings Momentum
Our first month of Q3 2019 earnings has our Up/Down Ratio reading at 1.37. This well below average figure is easily the lowest “one-month” number of our 2019 YOY earnings hangover.
Small Cap vs Mid Cap vs Large Cap
A second month of modest outperformance by the Small Caps has helped lift our Ratio of Ratios from the extreme 23% discount registered at the end of August. If recession fears remain muted, we’d expect this vignette to continue to march toward its long-term normalcy.
Growth vs Value vs Cyclicals
After ten quarters of underperformance, the sun is shining on Large Cap Value. Since the end of August: Royal Blue Growth -0.4%; Royal Blue Value +9.2%.
Additional Factors
Our favorite Cupertino-based tech firm is on a roll. Over the past two months, Apple has gained 19.1% and added $160 billion to its market valuation (that’s one Citigroup or two Caterpillars). This advance has propelled Apple back into the exalted 4% club (market cap within S&P 500), joining Microsoft with a similar $1.1 trillion valuation.
Earnings Momentum
As we roll-in the final month of Q2 earnings, our Up/Down Ratio reads only 1.11. This quarter’s figure was looking back to the best period of the 2018 earnings bonanza (2.06 ratio in Q218).
Small Cap vs Mid Cap vs Large Cap
Modest outperformance from the Small Caps helped pull our Ratio of Ratios out of its recent nosedive. Still, this vignette sits at 18-year lows, and there’s no guarantee that the relative valuation plunge in Small Caps won’t resume.
Growth vs Value vs Cyclicals
Our Royal Blue Value segment surged in September and ended ten consecutive quarters of underperformance to Royal Blue Growth. Since the start of 2017: Royal Blue Growth +64.9%; Small Cap Value +5.9%.
Additional Factors
The weather vane on top of the S&P 500 swung violently in September. A sudden preference for Value stocks (not just low volatility) over Growth was intertwined with a dramatic crash in the Momentum factor. Similarly, the Equal Weighted Average, which had been steadily losing ground to the Cap Weighted measure, snapped back and almost pulled even in YTD performance.
Earnings Momentum
Depending on one’s preferred earnings measurement (operational, reported, GAAP, non-GAAP), YOY earnings growth for Q2 will be zero or, at best, the very low single-digits.
Small Cap vs Mid Cap vs Large Cap
Another month of Small Cap underperformance has sent our Ratio of Ratios to a new contemporary low. Looking back to the late 1990s as a guide, a divergence in valuations can persist for several years.
Growth vs Value vs Cyclicals
Our Royal Blue Growth stocks shined with a 2.2% August gain as the rest of the segments faltered. Since the start of 2017: Royal Blue Growth +67.6%; Small Cap Value +0.75%.
Additional Factors
Yields crashed, gold surged, and investors fawned over low-volatility dividend-paying stocks. The giant, deflation-breathing lizard that has plagued our friends in the Far East for the past three decades seemed like it was lurking just off our shores.
Earnings Momentum
For the first month of Q2 2019 earnings, our Up/Down Ratio reads 1.50. This below-average figure was expected as we continue to work through the rough comparisons from 2018.
Small Cap vs Mid Cap vs Large Cap
Just one year ago, this relationship registered a Large Cap premium of 12%. During the last twelve months, the S&P 500 gained 6% compared to a 6% loss in the Russell 2000 (price return only).
Subscribe to Advisor Newsletter