FINANCIAL MARKET UPDATE 5.19.2020

STORY OF THE WEEK

VALUE IS HISTORICALLY CHEAP

The stock market has staged a strong rally in recent weeks, gaining over 32% since bottoming on March 23rd. At this point, the S&P 500 is within 12% of its previous high and no longer represents a bargain. Luckily for investors, other areas of the market remain cheap by historical standards and continue to offer an attractive investment opportunity. Value stocks qualify here.

Value stocks represent a subset of companies whose share prices relative to some fundamental metric (such as book-value or earnings) are lower than the broad market. These stocks have historically delivered higher returns than the market, but for most of the period since the Financial Crisis of 2008-09, they have lagged. This trend has been exacerbated during the recent volatility that stemmed from the coronavirus response. As a result, the price discount of value stocks has been rapidly increasing. The chart below illustrates how big the discount for value has become. The higher the line goes, the cheaper they are. You can see that over the last 50+ years, they have never been cheaper!

Valuations have a strong tendency to ‘mean revert’ or return to normal levels after reaching extremes. This is evident in the chart above, where large discounts for value stocks compressed following the burst of the technology bubble in the late 1990s, and recovery from Financial Crisis in the late 2000s. Value saw strong relative performance after each of those episodes.

There is no way to know when value stocks will bounce back, and it’s entirely possible they will continue to get cheaper for an extended period of time. But while the S&P 500 as a whole may be getting more expensive, value stocks remain historically discounted. If the relative valuation normalizes, it should offer a strong tailwind for value investors.   

WEEK IN REVIEW

  • The market started this week off on strong footing, with the S&P 500 gaining 3.15% on Monday. This marked the largest single-day gain for the index since early April. Positive results from the clinical trials of a potential COVID-19 vaccine were largely credited for the rally.
  • Data published on Friday showed retail sales dropped 16.4% in April, versus an expected 12.3% drop. The clothing/accessories and electronics/appliances were the hardest hit categories, declining -78.8% and -60.6%, respectively. Online retail was the lone category in positive territory.
  • Following the furious rally in April, valuations for the S&P 500 are moving back toward expensive territory. The P/E ratio for the index increased to 19.7, which is higher than the February level of 19.5 and has likely increased further in May.

HOT READS

Markets

  • Most Investors Don’t Think This Rally Is For Real, According to Widely Followed Wall Street Survey (CNBC)
  • Be Careful Handling White Hot Moderna Shares (WSJ)
  • Terrible Retail Sales Report Shows Acceleration in fates of Struggling and Thriving Retailers (CNBC)

Investing

  • Nothing Fails Quite Like Success in the Stock Market (AWOCS)
  • Is (Systematic) Value Investing Dead (AQR)
  • The Beginning of the End? (IrrelevantInvestor)

Other

  • Federal Reserve Chairman Jerome Powell on the Coronavirus-Ravaged Economy (60 Minutes) Video
  • Starved for Action, Bettors Turn Nebraska Horse Track Into Must-See TV (NYT)
  • mRNA Vaccine Playlist (ReformedBroker)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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