Perspective :

Market Commentary | Feb 16, 2022

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We have met the enemy and he is us

Despite the strength in the job market, and until recently, an advancing stock market, consumers are increasingly souring on the future. The University of Michigan Consumer Sentiment Index just fell to its lowest level in a decade. The culprit – inflation. Consumers are projecting that their financial situation will deteriorate over the coming year, and they aren’t happy. But will the reason for that negative sentiment front load even more spending or will the fact that real wage growth isn’t keeping up with inflation temper the voracious consumer appetite?

According to the U.S. Bureau of Economic Analysis, personal consumption expenditures fell during the month of December, but on a year-over-year basis the growth in spending remained well above the levels seen over the past decade. And the January retail sales number just came in above expectations at 3.8%. On top of that, according to the Chicago Fed, the Great Resignation contributed about 1% to annualized inflation for much of 2021. Those individuals who were employed and switched jobs certainly helped their own pocketbooks but contributed to the already growing inflationary problem.

On the equity front, February has played out much like the prior two months. Through Valentine’s Day, the previously unloved companies in the Russell 1000 Value Index held onto a 287-basis point (bps) advantage over their glamorous and highly pursued peers within Russell 1000 Growth Index, bringing their trailing three-month advantage to 9.1%. Energy stocks and financials have been in the driver seat, while communication services and tech stocks have been unceremoniously dumped.

Emerging market, international developed, and U.S. small cap stocks have all been outperforming U.S. large caps, with month-to-date returns of 1.1%, 0.4%, and -0.2%, respectively. And on a trailing 12-month basis, the S&P 600® trades at about the biggest discount to the S&P 500® that we’ve seen since the tech wreck. For those with long memories you might recall that turned out to be a pretty good time to own small caps on a relative basis. As the NASDAQ plummeted by over 80% from March of 2000 through September 2002, quality small caps, represented by the S&P 600, were down just 8%, and the Russell 2000 Value Index was up almost 14%.

Elsewhere, all things rate sensitive – preferred stocks, REITs, long-term Treasuries – have continued to get punished, as the yield on the 10-year advanced by 26 bps since the end of January. In fact, all fixed income categories that we model are in the red, both month-to-date and year-to-date. But the increase in longer term rates may be coming to an end as the market anticipates ever more action by the Fed on the front end of the curve, which has had a material flattening effect.

To the spree shoppers and the job hoppers, we’re watching you.

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U.S. Large Cap Growth Russell 1000 Growth Measures the performance of the large- cap growth segment of the US equity universe.
U.S. Large Cap Value Russell 1000 Value Measures the performance of the large-cap value segment of the US equity universe.
U.S. Small Cap Russell 2000 Measures the performance of the small-cap segment of the U.S. equity market.
U.S. Quality Small Cap S&P 600 Measures the performance of the quality small-cap segment of the U.S. equity market.
U.S. Large Cap Equity S&P 500 Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
International Developed Equity MSCI EAFE Designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Emerging Markets MSCI Emerging Markets Captures large and mid cap representation across 27 Emerging Markets (EM) countries.
REITS FTSE NAREIT Equity REIT A free-float adjusted, market capitalization-weighted index of U.S. equity REITs.
Long-Term Treasuries Bloomberg US Treasury 20+ Year Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity.


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The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

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