Blog of HORAN Capital Advisors | Sep 19, 2016 05:59AM ET
A little more than a year ago we wrote about the outperformance of the low volatility strategy versus a more risk on/high beta strategy. At that time it was noted low volatility could persist; however, if the broader market reached new highs, the high beta strategy would likely outperform low volatility.
This has essentially played out and as the calendar turned to 2016 the early year market pullback saw the high beta strategy succumb to significant selling pressure and was down 20% into the February low, almost twice the broader market's beginning of year decline.
Once the market began recovering from the February low though, high beta has outperformed the low volatility strategy, 25% versus 9%, respectively.
In the high beta strategy, 34% of its allocation is in the energy sector while the low volatility strategy has no energy allocation. In fact, seven of the top ten holdings in SPHB are energy names and a number of these energy positions have seen out sized market returns since the February low.
Another area of the market that has seen 'risk on' outperformance is in the small cap area of the equity market. Again, since the market bottom in February, small cap has outperformed large cap by 600 basis points. Playing to small caps favor is the relative valuation of small cap is cheaper than large cap; however, both small and large stocks are trading at elevated valuation levels.
Both energy and currency headwinds are projected to subside as one looks out over the next twelve months with currency headwinds already lessening on a year over year basis.
S&P 500 year over year earnings growth is anticipated to be low double digits in the back half of 2017. Admittedly, the second half of 2017 is a long way off, especially when the market is laser focused on tomorrow, but even high single digit growth would likely be viewed positively by the market and this has a high probability of being realized, all else being equal.
One positive factor though is the fact the market historically has not incurred a significant correction when everyone is positioned for one or expecting one. We continue to favor areas of the market that are growing top and bottom line earnings, like technology, so long as valuations are supportive of earnings growth expectations.
We continue to remain cautious on some of the income yielding segments, utilities in particular, where valuations seem far ahead of company growth expectations. Some in the investment community refer to this segment of the market as the STUBs, Staples, Telecom, Utilities and bonds.
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