We’ve seen a brutal rotation over the last week in many asset classes. Brutal in the sense of its speed and magnitude. Starting with bonds. After a downward trajectory in yields all year, this trend accelerated dramatically in July and August – most notably, the yield on 30-year Treasuries fell almost 60 bps in 60 days (at one point reaching an all-time low of 1.95%). In what can now be characterized as an “overshoot” in August (at least in part) we have seen a sharp snapback in an even shorter period of time. As the table below indicates, as of today, we’ve recovered 53-87% of the fall in yields since the start of September. In our view, this kind of volatility in the bond market – significantly higher than equities over the last six weeks –tends to make professionals very uncomfortable as bonds are expected to have lower volatility than equities in balanced portfolios.
- From a sector perspective, investors moved away from YTD winners that are seen as defensive: Technology (↑7% #7 rank / 29.4% YTD August #1 rank), Real Estate (↓0.4% #11 rank / 28.5% YTD #2 rank), Consumer Staples (↑1.1% #8 rank / 21.2% YTD #4 rank) and Utilities (↑4.5% #9 rank / 20.3% YTD #6 rank). And towards YTD losers that are seen as cyclical: Financials (↑5.1% #2 rank / #14.3% YTD #8 rank), Industrials (↑.2% #3 rank / ↑19.0% YTD #7 rank) and Energy (↑5.5% #1 rank / ↑2.2% YTD #11 rank).
- From a style perspective, Small Cap, an underperformer all year regained some ground in September to date (Russell 2000 ↑5.44% /↑11.8% YTD August). In addition, while Growth (RLG ↑23.3% YTD August) continued to outperform Value (RLV ↑13.8) by 9.5% YTD through August. However, this has reversed in September to date, with RLV (↑4.4%) outperforming RLG (↑1.4%) by 3.0%.
- From a factor perspective, Quality and Low Volatility were at or near all-time highs heading into September on a relative basis. Meanwhile, Small and Value were close to all-time lows. As you may have guessed, we are starting to see reversions to the mean so far in September.
A few things may be coming together to drive this short-term move:
- Better sentiment with respect to global economies. Within a few days, we’ve gone from concerns about a recession to an “all clear” related mostly to softer language by both parties on the trade.
- Bonds came too far too fast. In a very short period of time, the market seems concerned about inflation instead of deflation. The sharp reversal has generally put higher multiple stocks in the cross-hairs.
- Quant strategies kicked in to exploit relative value trades. The velocity of the move suggests that the machines may have gone into overdrive to correct short-term imbalances.
It remains to be seen whether or not these moves are corrective measures to adjust previously crowded trades, or a complete shift in thinking by investors. Time will tell. However, from our perspective and all things being equal, we prefer to buy companies with attractive secular growth stories with an identifiable catalyst when they are cheap and unloved – in other words, before the market recognizes these attractive attributes. In our opinion, buying solely on price momentum is a fool’s errand, relying on the “greater fool” theory to be successful. Fundamental, results based momentum is the precursor to actual price momentum and, from our perspective, a better entry point for most investors.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of September 2019 and are provided for informational purposes only. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.