Uncategorized, Weekly Update

No Record Highs Here

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Published August 25, 2017


Below from Delta is a good overview of the gap between different stock indexes and how large that gap has been this year. In reading this remember that small-cap value stocks are the best performing group over the history of the stock market. That this group is so substantially under-performing might mean something.

Here’s Delta’s analysis:

“Headline news can be misleading. During much of 2017, we have seen and heard incessant headlines about the market reaching new all-time highs. It sounds bullish. As a stock investor, you may look at the results in your own portfolio and wonder what market is being referred to by the headline news.

Large capitalization stocks measured by the S&P 500 (ticker symbol: IVV) are up roughly 10% year-to-date (YTD) versus small capitalization stocks which are up only about 1.5% as measured by the Russell 2000 (IWM).

Chart 1: Large Cap vs. Small Cap, YTD 2017

Large Cap vs. Small Cap, YTD 2017

Value stocks (IVE) are under-performing growth stocks (IVW). The chart below shows the S&P 500 value stocks are under-performing the S&P 500 growth stocks year-to-date by roughly -12%.

Chart 2: S&P 500 Value vs. Growth, YTD 2017

S&P 500 Value vs. Growth, YTD 2017

Perhaps the most striking comparison of the year is the NASDAQ 100 (QQQ) up roughly 21% versus small cap value (IVN) which is down on the year by about -4%.

Chart 3: NASDAQ 100 vs. Small Cap Value, YTD 2017

Nasdaq 100 vs. Small Cap Value, YTD 2017

Is the market bullish or bearish? It all depends on which market you are talking about.

Here is what we know about the markets.

  1. Many significant parts of the market have shown little appreciation year-to-date
  2. Broadly, earnings and revenues have been rising and exceeding estimates
  3. There are no current signs of a recession
  4. International economies are expanding at an accelerating rate

Many parts of the market are less expensive relative to their earnings than they were at the start of the year. As we approach the end of 2017, investors will increasingly shift their price/earnings valuations to account for 2018 earnings which are estimated by FactSet to be up about 11% year-over-year.

A loss of momentum in many sectors of the overall stock market can be a bearish signal. In this case, we are seeing a loss of stock price momentum without seeing a loss in fundamental economic momentum. Bull markets are characterized by times of appreciation followed by times of price consolidation. This week, it appears many parts of the market are in a time of consolidation rather than correction.”

Market Update

After four straight weeks downward spin for the Nasdaq and small-cap indexes, stocks managed a slight bounce this week. Monday offered no movement with little news as investors awaited the Fed’s annual Jackson Hole meeting late in the week to offer further guidance on interest rate policy. Tuesday brought a solid rally with stocks rising +1% as word of progress on the tax reform front seemed to boost investor confidence. Stocks failed to build on Tuesday’s move, however, giving back -0.3% Wednesday with political wrangling over the upcoming government budget being the only news of note. Thursday again saw no movement with a -0.1% finish driven by caution ahead of Fed Chairwoman Yellen’s Jackson Hole speech Friday. That speech offered no clues to change the outlook for interest rates. However, investors took it as positive for keeping rates low pushing money into bonds while stocks held modestly positive.

Stocks bounced back to post a +0.76% gain in the S&P 500 (SPY) while the Nasdaq 100 (QQQ) rose +0.52% and small-caps (IWM) rebounded +1.45%.

Warm wishes and until next week.