Q2 2021 is in the books. We enter the month of July with US equities trading at all-time highs, interest rates forming multi-month lows, and volatility returning to pre-pandemic levels. The current news narrative is centered around inflation and whether the Fed’s “transitory” stance is likely to be true or not. Despite this narrative, last quarter long-term US treasury bonds formed multi-month highs. All this talk about inflation and we’re seeing t-bonds print new highs? It’s always interesting when the narrative runs counter to actual price action. We’re not attempting to speculate on the direction of t-bonds - We are simply pointing out that often headlines and price action tell two very different stories. Below is a chart of US Treasury Bond futures alongside the 14-period Relative Strength Index.
Growth vs. Value
With interest rates falling and the yield curve beginning to flatten, high quality US growth names saw a boost in performance. The areas of the market which outperformed to start the year (smallcaps, value, financials, energy etc.) took a backseat to Mega-cap leadership. Year to date as of July 10th, S&P 500 Growth is outperforming S&P 500 Value by 23 basis points. Why do we bring this up? Because in this type of environment, it pays to have a blended equity allocation. The question should not be, “do we invest in Growth or Value?” Rather, “do we own both Growth and Value?” There are attractive areas within both factors. Having a dogmatic approach to one factor is not recommended and can weigh on long-term returns. Stocks that are deemed “growth companies” can develop into what investors would consider a value stock. Why limit yourself to one or the other?
When it comes to market breadth, the Advance-Decline Line (AD Line) is a great indicator. The AD Line calculates the number of advancing stocks less the number of declining stocks of a particular index. The AD Line is a cumulative measure of Net Advances, rising when it is positive and falling when it is negative. Below is a chart of the Nasdaq Composite and its AD Line. A divergence emerged on June 29th and remains as of the date of this post. Although the composite made new all-time highs, the AD Line is struggling to surpass its most recent peak. This datapoint is notable, but for now that’s all it is – notable. Q2 saw strong relative performance from mega-cap technology, this chart outlines the fact that although the mega-caps are pulling the broad market higher, participation from lesser weighted names is declining. Whether or not the AD line is foreshadowing a reversal in the index is unclear, but it is certainly something to keep an eye on.
Earlier this month, the US celebrated Independence Day. During that same week, the S&P 500 relative to the FTSE All-World Ex. US Index made a new all-time high. Quite the way to commemorate the birth of our Nation! It wasn’t too long ago that US equity underperformance was in full focus, as other developed nations more heavily weighted in financials were outperforming. Below is a chart of the S&P 500 vs. FTSE All-World Ex. US Index and the ratio’s 200 day moving average. Even though international equities are more attractive from a valuation standpoint, the recent surge in mega-cap technology has boosted the benchmark US stock index to new absolute and relative highs.