1/ Directing Traffic
2/ Gauges of Risk Appetite
3/ Move Lower in Yields
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1/ Directing Traffic
The new highs from large-cap growth relative to large-cap value are yet to be confirmed by the small-caps. The below chart highlights two growth versus value ratios – the first looks at the large-caps by way of the S&P 500 Index, the other focuses on small-caps via the Russell 2000 Index. The chart contains over two years of price history and notes historical divergences between the two ratios. A mentor of mine would suggest I avoid directional predictions and instead focus on trend, noting the divergence and how it may impact the strength of trend. In other words, if you are long large-cap growth over value (most index investors naturally are), you very much want to see small-cap growth form new highs relative to small-cap value. This would confirm the strength we’re seeing from growth equity.
2/ Gauges of Risk Appetite
One price ratio used to measure investor risk appetite is the Consumer Discretionary vs. Consumer Staples ratio. The thought is that if investors are bidding up discretionary (staples) stocks then risk appetite is strong (weak). The below chart is limited to the large-cap space, but highlights both the market-cap weight and the equal-weight ratio.
In February, we witnessed the beginning of a divergence between the two. As equal-weight formed new highs, market-cap weight failed to do so and subsequently, formed new year-to-date lows. Over the last few weeks, the ratios continue to diverge as market-cap weight hangs out just off the 2024 low.
3/ Move Lower in Yields
The move lower in yields is being confirmed by the Energy vs. Utilities price ratio. Energy companies and energy commodities benefit from inflationary forces. When inflation is present, interest rates tend to be higher. Utilities companies are more sensitive to rates compared to the average business due to their very high debt levels. They also carry bond-alternative like characteristics and if bonds are paying a decent coupon, investors may lose interest in the added volatility of a Utility stock.
The ratio began its move lower in mid-April, meanwhile rates didn’t top until a few weeks later in early May. The current move lower in yields is being confirmed by the equity market. For bond bulls, this is good news!
About This Week's Author
Shane Murphy, CMT has been a CMT Charterholder since 2022. He is currently a Wealth Management Associate at Michael Roberts Associates, Inc. where he assists in portfolio construction, investment research, and financial planning.
Originally posted on June 6th, 2024
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