Taking a closer look at underlying sector and thematic rotations that have occurred over the past two years, we’ve identified four distinct market environments that have existed. Importantly, these have been driven by investors’ collective perceptions of (1) the Fed’s overall tone (i.e., dovishness or hawkishness), and (2) the global growth outlook.
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Year-to-date, growth stocks have handily outperformed value (R1G +8% vs. R1V +1%) in the face of coronavirus fears and some other near-term economic headwinds. Over the very near-term, we expect this trend to continue into choppy global economic data and potential uncertainty around the March 3rd ‘Super Tuesday’ democratic primaries. However, looking out from now to year-end, we expect global cyclical economic data to surprise to the upside as coronavirus fears fade and a rebound in global trade occurs. This should drive a sharp reversal from Growth to Value stocks.
Crude oil prices have now plummeted by roughly -19% over the past five weeks into coronavirus fears and intensifying global growth concerns. Sharply lower oil prices obviously create significant near-term headwinds for oil producing companies and countries. Persistently low prices also have the potential to create energy-related credit losses, which can negatively impact the high yield credit market as well as bank loan loss trends. (Although, we haven’t yet seen significant signs of stress.)
Over the past six years, the relative performance of Value to Growth has been highly correlated with economic surprises, as measured by Bloomberg’s U.S. Surveys & Business Cycle Indicators Surprise Index. In our view, this index does a better job at capturing the cyclical turns in the economy than other available surprises indices which are more broadly based.
Through last night (02/05/20), 283 S&P 500 companies have reported 4Q earnings results. Thus far, surprises have been strong with 51% of companies beating on the top-line by +0.8% in aggregate and 69% of companies posting surpassing analyst expectations on the bottom line by +5.1% in aggregate. More importantly, management guidance also been strong. To date, the negative-to-positive guidance ratio is the best it’s been since 2Q18.
While we don’t yet have full results from Iowa’s caucus, it appears that Bernie Sanders will still have the most momentum in his bid for the nomination, given that he is leading in the popular vote. The Senator is also leading in the polls for the New Hampshire Primary being held on the 11th. Sanders also has the highest RealClearPolitics average in California (26%), which has the highest delegate allotment at ~10% of the overall total. His PredictIt odds of winning the nomination now stand at 39%.
Over the past 30 years, the S&P 500’s maximum annual drawdown has averaged 12.8%. Even during bull markets, investors should expect a selloff of at least 5%, if not 10%, at some point during the year.
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