Talking Points – May 2020

May 27, 2020 – Investors Remain Negative

We have discussed many ways to judge investor sentiment, as we believe it is critically important. Much of sentiment data comes in the form of surveys and opinions. However, we prefer when we have quality sentiment data that involves what people are actually doing with their money.

Today, we look at data which tells us speculators in S&P 500 futures contracts remain very short, expecting stocks to decline.

Source: Strategas

Historically, when investors are positioned this negatively stocks do well. Of course stocks already have had a big recovery rally, but it might take even more upside for these negatively positioned investors to capitulate and reverse their views.

May 20, 2020 – Is it Time for New Leadership in Stocks?

Most of 2020, just like recent years, has been led by high quality, large cap stocks, mostly in tech. They were joined during the market decline by a handful of names positioned to benefit due to their exposure to video conference technology, or virtual medicine, to a name a couple of examples. However, this past Monday markets rallied higher with a very notable difference in leadership.

As we see in our first chart, the stocks that had performed the worst during the market decline returned an enormous 10.6% on Monday, while the previously best performing stocks increased by “only” 2%.

Source: Strategas

Looked at another way, we see below high beta stocks had their best relative performance day since 2009.

Source: Strategas

There have been a few other strong up days by these stocks during the market recovery, but not yet to the extent as is common off market lows. Is this the start to a more sustained outperformance by the former laggards? The real question becomes should investors shift away from the high quality buy and hold type positions and shift towards the more cyclical and low quality assets? The gains can be swift and strong, but these securities are typically best viewed as rentals and not to be owned indefinitely.  We continue to look for opportunities to add in the tactical portion of our portfolios more cyclical type holdings that still pass our quality screen. 

May 13, 2020 – The Growth Versus Value Debate

As most investors know, stocks categorized as growth have far outperformed value in recent years despite just the opposite being true if we were to look back over many decades.

Our first chart shows that growth relative to value has made such an enormous move that it is all the way back to the peak of the tech bubble twenty years ago.

Source: BofA Merrill Lynch

That frightening chart is balanced by this look at valuation.  The relative P/E of growth has really just begun to move higher versus value.

Source: BofA Merrill Lynch

We have two important thoughts on this subject. First, rather than a specific companies value affecting the above charts it is much more important what sectors are moving. If tech and healthcare keep doing well compared to financials and energy growth will keep winning.

Second, the fundamental analysis part of our process attempts to determine the 3-5 year potential of a security based on both its potential growth and valuation. In other words, we are not tied to any one style. We don’t think just because something is cheap it is a good investment anymore than we think just because something is expensive it is a bad investment.  

May 6, 2020 – Why U.S. Stocks Have Outperformed

The trend in recent years has been for U.S. stock markets to outperform most international. That has so far continued during this volatile past few months. Much has been written about the potential reasons for that. However, one that is less discussed is the actual sector composition of the respective markets.

We see in our first chart that the more cyclical sectors, which have lagged, make up a larger percentage of international markets. 

Source: SunTrust IAG

The cyclical sectors tend to fall under the value category, while areas such as tech and healthcare that have performed well are more growth oriented. This long-term chart shows that value had an incredible track record of outperforming growth since WWII. However, for the past decade plus growth is the clear winner. 

Source: SunTrust IAG

Is this growth outperformance a lengthy, but temporary surge, or is it the start of a new long-term relative outperformance uptrend? The answer to this is something to monitor closely in the months, quarters and years ahead, as the result will be a key factor in determining when international stocks will finally start to outperform.