Key Takeaway: Q1 returns reflect a bifurcated market. Weekly data shows breadth struggling for traction. Inflation-fighting proposals are political palliatives, not economic solutions.
We closed the book on Q1 last week and some of the stats are stunning:
There was a 50 percentage point spread between the best performing sector (Energy) and the worst performing sector (Communication Services) in the quarter, the widest such gap in years.
An even greater dispersion was seen between the best performing ACWI market in the quarter (Brazil) and the worst (Egypt).
From an asset class perspective, commodities (+27%) posted their best gain in decades while bonds (-6%) experienced their worst loss in decades. The 60/40 (stock/bond) benchmark portfolio stumbled to one of its worst starts in the past quarter...
We discussed the need to look beneath the surface of the market in our Weekly Townhall and I mentioned it again on the Townhall Takeaway Livestream. This chart for the weekend hits that point one more time. When we look across the global market composites, Emerging Markets have experienced the largest drawdown from their 52-week high. When we look beneath the surface of the indexes, the median emerging market has had a smaller drawdown than the median Developed Market or the median Frontier Market. When we look at it from a country-level perspective, trends in Emerging Markets vs Developed Markets are stronger than they’ve been at any point in the past decade. That isn’t reflected in the indexes yet, but it may just be a matter of time until we see that transition. Speaking of transitions, while this chart is still looking at the distance below 52-week highs, we are starting to find ourselves thinking more about where things are relative to their 52-week lows.
This year’s March Madness has been maddening indeed. Brackets were busted early and often. Three of the #1 seeds lost before they even had a chance to play for a trip to the Final Four. As challenging (and exciting) as that was, I’ve got a deeper frustration with it: It’s a passive participant’s paradise.
Let me explain.
Before the field of 64 is even set, we get deep dives on the various teams and their prospects. Stats are analyzed, stories are told. When the brackets are set, the picking begins. Though no games have yet been played, participants reason through potential matchups, from the first round all the way through to the finals. Bragging rights (and often more than that) are at stake for having properly allocated all your resources before the first whistle is blown. It’s about setting and forgetting. No feedback loops, no opportunities to adjust exposure based on changing tournament conditions.
Key Takeaway: Price action has a way of changing sentiment, and the recent bout of strength has brought signs of hope. Optimism is on the rise with an uptick in bulls, a rebound in both the II and AAII bull-bear spreads, and an increase in exposure by active equity managers. Yet, bears linger and the drop in put/call ratios is driven by decreasing put activity. This speaks to less of a risk-off tone rather than a definitive sign of risk-on behavior. Though optimism is in the air, it’s going to take further improvements in trend, momentum, and breadth for bears to change their tune in support of a sustained rally.
Sentiment Report Chart of the Week: Breadth Backdrop Improving
The rally off of the mid-March stock market lows has investors feeling better (or at least less bad). This improved mood (and the rebound in price that helped fuel it) will likely have more staying power if it’s accompanied by a better breadth backdrop. We are heading in that direction, but there is...
Commodities catching up, but a long way from being caught up
Dynamic exposure allows trend following in a portfolio context
The first quarter still has two days of life left in it, though for many investors its end cannot come soon enough. The S&P 500 made a new high on the first day of the year, but has been underwater ever since. Bonds have been in the red all year, suffering their worst decline in decades. Commodities (and the minority of investors that have exposure there) enjoyed their best quarter in decades.
Each of these asset classes has its own story and dominant theme from Q1. For stocks, it’s the longest stretch of more new lows than new highs since the financial crisis. For bonds, it’s that yields around the world are moving to their highest levels in years (US & German yields get a lot of attention...
March rally takes some sting off of a challenging Q1.
Short-term strength not yet reflected in longer-term trends.
More new lows than new highs in the US, but Emerging Market new high list expands.
Stocks continued to bounce off of their March lows last week. It’s not quite lipstick on a pig but this move does take some of the sting off of what has been a weak Q1 for equities. All eleven sectors in the S&P 500 are now in positive territory for March, but only three (Energy, Utilities and Financials) have YTD gains and two of those, just barely so. Four sectors, accounting for more than 50% of the market cap of the S&P 500, are still down 8% or more heading into the final week of the quarter.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Is There Enough in the Tank?
Pretty much everything in the world of energy has been on fire for the last quarter. Crude oil and energy stocks have been the stand-out performers this year as both have enjoyed a swift leg higher since early January. Despite the impressive price action, both are at logical levels to do some consolidating. Crude Oil and the Energy Sector SPDR (XLE) are challenging critical levels of overhead supply at former highs. Both of these areas have acted as resistance in the past, so it would not be unusual for sellers to show up once again. While the primary trends are still very much intact for energy stocks and futures, a breather here and some digestion of the recent gains would be constructive. The next key piece of information should come in the form of how that digestion looks. Do we correct through price, or time?
Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.
By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the big picture context and provides insights regarding the structural trends at play.
Let's jump right into it with some of the major takeaways from this week's report:
* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.
Macro Universe:
Our macro universe was green this week as 57% of our list closed higher with a median return of 0.42%.
The US 10-Year Yield $TNX was this week's big winner, tacking on 36bps and closing just shy of 2.5%.
The biggest loser was Lumber $LB, with a weekly loss of -14.96%.
There was a 13% gain in the percentage of assets on our list within 5% of their 52-week highs – currently at 34%.
There is still one week to go before it ends, but Q1 2022 has been a remarkable quarter in many respects. If this year has taught us anything, it’s that a lot could change between now and when the closing bell rings next Thursday. But as it stands now, this will be the first down quarter for stocks since Q1 2020 and it will go down as the worst quarter for bonds in a very long time. Both stocks and bonds falling by more than just a marginal amount makes this a particularly forgettable quarter for investors in passive 60/40-type portfolios. There has been no place for them to hide. Not strength to offset weakness. Recent weak quarters for balanced portfolios saw strength in bonds offsetting weakness in stocks. Recent weak quarters for bonds have coincided with strength in stocks. The only somewhat similar experience in the past quarter century was Q3 2008 - bonds were down but only modestly. Two takeaways: First, this helps explain some of the dour mood among investors. Second, quarterly rebalancing this time around will have otherwise passive investors sell what has been weak (stocks) and buying what has been even weaker (bonds...
I had a chance to catch up with my friend Dave Keller this week. We talked about the overall market environment, touching specifically on market breadth and the implications of an accelerated tightening cycle by the Fed. You can check out a replay of the entire conversation here.
At one point, Dave asked me about my perspective on one of the most important questions facing investors right now. It’s about labeling oneself as either a growth investor or a value investor, and how to operate within that framework in the current market environment.
It’s important because it is pervasive. It’s important because it can be expensive.
It’s important, but it’s also weird, leading investors to discount reality and operate within narratives.