Market review 22.11.20
Value, smaller-caps, real estate
Hello everyone,
I don’t know about you, but I’ve had my fill of FTX news. Let’s focus on traditional markets.
Growth vs. Value
After more than a decade of underperformance, value has been significantly outperforming growth for the past year.
Back in May, I discussed the small-cap vs. large-cap ratio. Here’s the updated ratio chart, which spans a century. It’s still forming a nice 40-year base.
One important thing to note when looking at this ratio is that it’s more influenced by sector allocation rather than company size. Here’s how IJR (small-cap ETF) and IVV (large-cap ETF) are allocated:
We can see that the main difference is that IJR has a 19% less allocation to tech, and a 19% higher combined allocation to industrials, financials, and materials. As we’ve been seeing all year, the high inflation & rising interest rate environment favored the latter group and hurt technology.
Another way to see this is the S&P 500 equal vs. cap weight ratio:
The SPX equal-weighted index has a 15% lower allocation to tech compared to the popular cap-weighted index.
Lagging peaks in duration assets
Growth stocks are more rate-sensitive (higher duration) than value stocks. Gold and real estate are also rate-sensitive. But all these areas peaked with a lag:
I love that meme of the grim reaper going down a hallway knocking on the door of his next victim. Perhaps that door is residential real estate.
While the Teranet Canada Home Price Index is off 8% from its April highs, it’s still up 5% over the past year. This is despite the past 13+ years of falling mortgages rates being unwound in just the recent 3 quarters.
And in the US, the Case-Shiller National Home Price Index is only 2% off the highs reached in June.
Residential real estate is illiquid and dominated by retail market participants. Decades of rising housing prices (thanks in part to falling mortgage rates) have conditioned people to think that any corrections are short-term. So, despite mortgage rates having their steepest ascent in the last few quarters, sellers have been refusing to sell, keeping inventory low. This has kept prices afloat for now.
Commodities & the inflation trade
RINF broke down this week. Oil had a rough week, with WTI down 10%.
It’s tempting to think that we’re at that part of the market cycle where commodities are the next shoe to drop:
But what if the trends of this year continue? What if we have elevated inflation levels for a while and a stagflationary environment?
Consider:
XLE is the strongest sector (up 68% over past year and currently within 3% from 52w highs)
Lots of energy stocks made multi-decade breakouts in the past 1-2 years
Oil futures, broad commodity indices, and stocks like ENB are on major support
Commercial hedgers have their highest net exposure to oil in 6 years
Various Value vs. Growth charts are bullish, as we already looked at. The first person I saw that connected the value trade with inflation was Lawrence Hamtil in 2019. Checkout his blog post explaining it here.
Price is still telling us to be longer-term bullish select commodities and value stocks. And it’s telling us to be bearish stuff in free-fall (eg. bonds, growth stocks, etc).
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Twitter: @alphacharts.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.