It’s time for our annual August report called “Charts for the beach.” Take a look at five of our favorite charts that highlight what we think consensus is currently missing. Remember to wear your official RBA baseball cap while sitting in the sun!
An example of why you should ignore politics.
We have repeatedly pointed out that politics is about what should be, but investing is about what is. Listening to politicians for investment advice has rarely been worthwhile.
A recent example is the significant outperformance of the South Korean stock market. Our first chart shows that the performance of the South Korean stock market has year-to-date roughly tripled the performance of the US market, and is up more than 30% in USD terms. Importantly, that outperformance comes despite the geopolitical risks posed by North Korea. Politicians have focused on North Korea, but it’s been beneficial for investors to focus on South Korea’s improving fundamentals.
MSCI Korea Index vs. MSCI USA index
Year-to-date thru 7/31/17
Source: Bloomberg Finance L.P. For Index descriptors, see “Index Descriptions” at end of document.
Investors are warming to risk, but certainly aren’t risk takers
RBA’s three main investment factors are profits, liquidity, and sentiment, and we follow a host of proprietary sentiment indicators to gauge whether investors are too scared or too willing to take risk. Our indicators almost uniformly show that investors are warming to risk, but have yet to become true risk takers.
Our second chart shows the relative valuation of high beta and low beta stocks in the US. One can see that investors have been very risk averse during this cycle, but that aversion is beginning to subside. The valuation of higher beta stocks has risen, but higher beta stocks are still selling at a discount to the broader market. It has generally been a cautious signal when high beta stocks sell at premium valuations.
Forward Relative P/E by S&P 500®
High & Low Beta Quintiles
as of 7/31/17
Source: Richard Bernstein Advisors LLC, BofAML US Quantitative Strategy
US stock market returns don’t look extreme relative to history
Not only are investors still risk averse, but stock market returns are not as extreme as some might suggest. Our third chart contrasts the current five-year return of the S&P 500® with the historical distribution of five-year returns. Of course, the recent experience is above the median because there is a bull market. However, one should immediately recognize that the last five years’ return falls far short of the typical end-of-cycle, “blow off” rally.
The last five years’ return of 14.8% is well short of the median return of 21.4% that occurred in the five years leading up to the peak of bull markets.
Distribution of S&P 500® Rolling 5-Year
Annualized Total Returns (Dec. 1930−Jul. 2017)
Source: Richard Bernstein Advisors LLC, Bloomberg Finance L.P. Standard & Poor’s