May 17, 2024
Stock markets have been on fire in the past few sessions. Ongoing inflation in US and EU, higher than the central banks' target rates but not too high, is a proven boost to stocks. Also, the lack of dramatic geopolitical news after some hot months seems also to be well accepted by investors.
This brief post is focused on showing some recent equity behaviors, using the US stock market as key reference.
First, the equity factor that has been most successful in the past few months has been "momentum" (red line below):
It is absolutely typical to see momentum (which refers to the tendency of winning stocks to continue performing well in the near term) outperforming all other styles in the mature (post-peak) phase of the economic cycle: large caps and big stocks keep piling up gains steadily.
If we zoom-in, in the last month of brief under-performance we see a different factor emerging above all others: high dividend yielders. It is also normal to see high dividend stocks outperform either when interest rates are rising or when inflation is higher: the previous US CPI print out at 3.5% above expectations (while the last has been at 3.4% just a few days ago) scared investors and seems to justify such move.
Not many would have noticed that in the recent volatile sessions Europe has outperformed the US. Such out-performance has faded and the markets are balanced (see below the past 1-month view).
Finally, the key question I tend to receive on investing at dinner tables is why stocks keep on climbing if they are so expensive. Remember that stocks price-in expected company earnings over the long term. As earnings keep on rising, the relationship of price vs earnings keeps falling, and will fall for some time, making stocks CHEAPER instead of more expensive vs recent times.
Speak soon!
