We were surprised to see that all differentials ten years and longer are still below their respective 1926-to-date medians, indicating they still have the potential to keep moving towards historical median levels. We expect stocks to outperform bonds going forward.
Momentum and Value worked in 2013. Materials and Financials were the easiest sectors to exploit; Discretionary and Tech the most difficult. Momentum works in December; Value and Small Caps at the start of the year.
The Russell 2000 is about five points ahead of Large Caps YTD, and is approaching its April 2011 long-term relative peak. We view this outperformance as their leadership’s last gasp and not a new cycle.
The historical batting average of this strategy has been decent, with gains in 9 of 18 years along with “excess” returns over the S&P 500 in 10 of 18 years. The best Bounce seasons have occurred when the market was either down for the year through September, or up only modestly.
We measure the sensitivity of common stocks to changes in interest rates using Implied Equity Duration. Growth-oriented sectors tend to have higher duration than Value-oriented sectors, while regional differences are largely explained by interest rate and risk premium differentials.
Today may feel different, but it isn’t. The past 13 months’ trading action in the U.S. is the second example of this phenomenon in the current (2009-to-date) cyclical bull market. We focus on 11 previous episodes for perspective. Plus we clarify recent thoughts on interest rates and stock market valuations.
Alternative assets have attractive return rates since 1994. But their portfolio diversification benefits have diminished as they become more equity like, though their correlations to bonds have fallen.
In this report we take an in-depth look at the evolution of the industry, particularly the U.S. mutual fund industry, to help understand how some fund flow trends are more of an indication of evolving investor preferences instead of an indication of retail investor sentiment toward a particular asset class.