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Investment Strategy Committee Notes – Q4 UpdateSubmitted by The Wealth Consulting Group on February 3rd, 2020
ISC Model Updates November & December:
The fourth quarter added an exclamation mark to a strong year for asset classes broadly. Equities, fixed income, and many major commodities all saw gains for the year. For equities, much of the gains were driven by multiple expansion rather than improving fundamentals, however. In fact, multiple expansion accounted for 92% of the S&P 500’s returns in 2019 per David Kostin and Goldman Sachs. Earnings only accounted for 8%.
Some of that multiple expansion fuel could be credit to the Federal Reserve’s surprise posture of accommodation relative to expectations coming into the year. While the three rate cuts played a part, the resumption of balance sheet expansion, despite the more muted fanfare, undoubtedly exerted significant influence. Jay Powell’s disabuse aside, the trajectory of the market’s ascent accelerated post “not QE (quantitative easing)” repo-relief in September.
Below is a chart of the market caps for the S&P 500’s largest constituents, Apple and Microsoft, and the size of the Federal Reserve’s balance sheet. After reaching a post QE3 peak of approximately $4.5T, Quantitative Tightening, QT, saw the size of the balance sheet reach a trough of around $3.76T in August of last year. It has since expanded back to over $4.1T erasing close to a year’s worth of tightening in about 4 months. Over that 4-month period, the two companies have added $500B to their combined market caps. Apple alone added over $300B.
To put that into perspective, a $300B addition in market cap is equal to the combined size of the bottom 42 constituents of the S&P 500. Only about 11 names in the S&P 500 have a market cap larger than the $300B that Apple added in 4 months! (All data is from YCharts, and it is as of, 1/27)
That’s the equivalent of about one Intel (currently just under the $300B cutoff)
Over two Costco’s
Eleven and a half Twitter
Or 31 and a half Under Armour!
New Trend or Flash in the Pan?
On the heels of our Q3 discussion around the dominance of large-cap growth, Q4 saw some cracks in the trend. While developed international did lag slightly for the quarter, as represented by the MSCI EAFE, it did outperform for the month of December. Emerging markets too outperformed for the month of December and bested the S&P 500 for the quarter as well.
Small-cap stocks, as represented by the Russell 2000, outperformed their large-cap brethren.
Lastly, value surpassed growth to close out the year outperforming by just over 1.5% for the quarter.
This all took place within the backdrop of a generally declining U.S. Dollar in Q4. The DXY fell .9% for the month of December.
As we look ahead to 2020, will this emergent rotation take hold, or is growth set to continue its dominance? We can’t divine the future, but in looking for a change, assessing the conditions that may have created these trends could help. Given general economic growth has been so scarce, investors have been willing to pay up for companies with strong growth. For growth stocks to fall out of favor, we might look to a bottom in global economic growth and thus growth opportunities become more abundant as a likely necessary condition. While not certain, there are some signs of recovery in the pockets of Asia and Europe. Markets being a discounting mechanism, the outperformance of these areas in Q4 could be an early indication of this change. The U.S. Dollar has also been strong over the general time period of U.S. asset outperformance generally and growth specifically. We might look for a breakdown of the dollar as another indicator of a trend change away from U.S. Large-Cap Growth. Both factors were in play during 2017 when the narrative was around a “synchronized global recovery.” These both proved untimely as the dollar rallied and global growth rolled over in 2018 and beyond. Will this time be different? This is a key question the committee will continue to be focused on throughout 2020.
The ISC Growth & Income Benchmark is a blend of 33% S&P 500, 9.6% S&P 400, 2.4% S&P 600, 10.8% MSCI EAFE, 4.2% MSCI Emerging Markets, 37% Barclays Aggregate, and 3% Cash.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including the fluctuation of dividends, loss of principal and potential illiquidity of the investment in a falling market.
The prices of small and mid-cap stocks are generally more volatile than large-cap stocks.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
WCG Wealth Advisors, The Wealth Consulting Group and LPL Financial are not affiliated with any of the entities referenced.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through chanced in the aggregate market value of 500 stocks representing all major industries
The S&P Growth and Value Indices are companies in each U.S. index that are split into two groups bases on a price-to-book ratio to create growth and value indices. The Value index contains companies with lower price-to-book ratios, while the Growth index contains those with higher ratios.
The S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies.
The S&P SmallCap 600 Index is an unmanaged index generally representative of the market for the stocks of small-capitalization U.S. companies.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa, and Asia.
The Russell 200 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S Aggregate Bond Index is an index of the U.S. investment-grade bond market, including both government and corporate bonds.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.