What A Year This Month Has Been

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What A Year This Month Has Been

Back when I worked at SAC, every trader could see the real time P&L for every other person in the room. Once in a while, the entire organization would sync up, with every trader showing a healthy gain for the day. This usually happened shortly after the open, at which point someone would invariably yell, “Close the market!” We all knew things could only go downhill from there. Such is the life of a trader….

As I look at the YTD performance for global capital markets, I can’t help but think many investors wish they could close out the year right now rather than face the next 11 months. It doesn’t work that way, of course…

To get a jump on the customary month-end wrap-ups, here’s our take on 3 key investment themes so far in 2019:

#1. It’s hard to find a major asset class that hasn’t worked YTD. Here is a list along with the ETF symbol we use to track each investment type:

  • Global equities (ACWI) +7.3%
  • S&P 500 (SPY) +7.1%
  • Russell 2000 US Small Caps (IWM) +10.3%
  • MSCI EAFE non-US developed economy equities (EFA) +6.6%
  • MSCI Emerging Markets equity index (EEM) +9.4%
  • US Corporate High Yield Bonds (HYG) +4.7%
  • US Investment Grade Corporates (LQD) +2.7%
  • Emerging Market Bonds (EMB) +4.0%
  • Gold (GLD) +2.8%
  • The one notable loser: long dated Treasuries (TLT), down 0.50%

Our take: January was the snap back from a deeply oversold December. The worse an asset class performed last month/last year, the better it did this month. There are exceptions like EAFE stocks, which have lagged US and EM stocks YTD despite a difficult 2018. But by and large “the last shall be first” was January’s tagline.

#2. In terms of US equity investment style, Value only outperformed Growth in large caps.

  • Large cap Value is +7.9% YTD
  • Large cap Growth is +6.2% YTD
  • But small cap Growth is actually slightly stronger YTD (+10.4%) than Value (+10.2%).
  • Why the difference? One important cause: Health Care is an outsized piece of both large cap (18%) and small cap (25%) Growth indices. But where large cap Health Care has languished (only +3.5% YTD), small cap Health Care has done better (+8.0%).
  • Financials have also contributed to the disparity. This distinctly “Value” group (+20% of both large and small cap Value indices) shows real outperformance for large caps (+9.1% YTD) but less so for small caps (+9.9% vs. +9.7% for the S&P 600 Small Cap index).

Our take: Value style investing caught a bid during Q4 2018’s selloff, but 2019 shows it may not remain as popular if equity markets continue to rally.Small caps show little performance differential between Growth and Value YTD, and large caps aren’t far behind.

#3: All you needed to do to outperform the S&P 500 in January was to underweight Health Care or Consumer Staples or Utilities. The other 8 sectors outperformed or matched the index:

  • Better than the S&P (in order of performance): Industrials +11.0%, Energy +10.5%, Real Estate +9.7%, Financials +9.1%, Consumer Discretionary +8.9%, Communications +7.4%, and Materials +7.2%.
  • Inline with the S&P 500: Technology +7.1%
  • Worse than the S&P 500: Health Care +3.5%, Consumer Staples +3.2%, and Utilities +1.3%.

Our take: we’re most interested to see how Financials and Technology perform in February. The former remains the cheapest group in the S&P 500 and has seriously lagged the broader market for years. The latter looked like a busted group at the end of last year but has since begun to recover. One (or ideally both) will need to rally further to provide leadership. Health Care – the other major S&P group – seems stuck for now.