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Friday, July 16, 2021
A market in motion usually stays in motion
It’s already been a strong year for the US equity market.
Until the close of trading on Thursday, the S&P 500 (^ GSPC) is up 16.1% year-to-date, while the Dow (^ DJI) and Nasdaq (^ IXIC) are both up more than 12%.
But of course, index-level gains don’t tell the full story of what’s happening in the market today or otherwise. As Canaccord Genuity strategist Tony Dwyer told Yahoo Finance Live earlier this week, beneath the surface of indexes hitting record highs, we’ve seen a rolling correction with factors, sectors and styles moving in and out of favor.
“Most institutional investors generally try to pick stocks and sectors,” Dwyer told Yahoo Finance. “That’s what they’re paid for. The frustration wasn’t the speed at which the markets were recovering, but the volatility in the sector rotation in the markets.”
Dwyer added, “People who watch the markets watch the S&P 500, they watch the NASDAQ, they are at new highs, it feels so exciting. But beneath the surface, most of the investors I speak to are their bravery. ”Are upset why it’s a digestive summer because it’s very hard to get a real theme because of the rotation between growth and value under the Surface.”
Growth stocks, as measured by the Vanguard Growth Index ETF (VUG), have gained around 10% in the last two months, while the Vanguard Value Index ETF (VTV) has fallen by 1.5% in this period; the S&P 500 has gained around 4.5% during this time.
Industrials (XLI), Materials (XLB), and Financials (XLF) have all trailed the S&P 500 since June. Facebook (FB), Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) are all within 5% of the record highs.
The story goes on
The rally we have seen in the bond market – where the yield on ten-year government bonds fell from around 1.75% to below 1.3% on Thursday – forms the basis for this current market environment. All other things being equal, lower interest rates indicate slower economic growth; they also lead investors to prefer faster growing sectors such as technology over sectors that are more cyclical, such as financials and industrials.
This rotation within the market has also hit notable bubbles such as SPACs, new issues, and meme trading. During Thursday’s trading session, AMC (AMC) and GameStop (GME) stocks were down more than 40% from their early June highs. The shares of the two companies have of course gained over 1,400% and 700% respectively over the year to date. The most recent new issues such as Coinbase (COIN), Krispy Kreme (DNUT), Oatly (OTLY) and Didi (DIDI) have also been traded listlessly since their IPO.
However, data from the Bespoke Investment Group suggests history is very much on the side of the market this year. In years when the market is doing so well in the first six months of the year, we tend to see more gains and limited discounts as the year progresses.
In a report released on Wednesday, Bespoke looked at the performance of the S&P 500 for each year since 1928 and extracted the 10 years of previous paths that correlated most strongly with 2021. Over those similar years, the S&P 500’s average profit to July 14 was 20.1%, with a median return of 18.8%.
“With this year’s growth of 16.2%, the extent of the growth so far this year is relatively close to the median of the previous 10 years,” wrote Bespoke.
“Looking ahead, the average performance of the S&P 500 over those 10 years has been 7.1% up with positive returns 70% of the time,” the company noted. “Compared to all years since 1928, the remainder of the year profit for those 10 years was significantly higher than the mean rest of the year profit of 4.0% for all years since 1928.”
In other words, in years where the market has risen at the rate we’ve seen so far in 2021, the S&P 500 also tends to deliver above average returns over the course of the year.
Additionally, Bespoke notes that in only two of the 10 years most similar in 2021, the second half saw more than 10% decline, with the mean correction from the highs only being a 2.3% decline.
So not only do stocks slide higher in such an environment, but they tend to do so with less than normal volatility. At least if you buy the index.
By Myles Udland, reporter and presenter for Yahoo Finance Live. Follow him at @MylesUdland
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What can be seen today
8:30 a.m. ET: Retail trade, Monthly comparison, June (-0.3% expected, -1.3% in May)
8:30 a.m. ET: Retail sales excluding cars and gasoline, June (0.4% expected, -0.8% in May)
10:00 a.m. ET: University of Michigan mood, July provisional (86.5 expected, 85.5 in June)
4:00 p.m. ET: Total net TIC flows, May ($ 101.2 billion in April)
4:00 p.m. ET: Long-term net TIC flows, May ($ 100.7 billion in April)
Before market opening: Karl Schwab (SCHW) is expected to report adjusted earnings of 75 cents per share on sales of $ 4.45 billion
7:30 a.m. ET: State Street Corp (STT) is expected to report adjusted earnings of $ 1.79 per share on revenue of $ 2.94 billion
European markets are rising as EU auto sales soar in June [Yahoo Finance UK]
Intel in talks to buy GlobalFoundries for approximately $ 30 billion: WSJ [Reuters]
Chinese regulators are sending cybersecurity review teams to Dididi [Reuters]
Fed chief Powell calls for an “appropriate regulatory framework” for stablecoins [Yahoo Finance]
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