AIQVM, S&P 500 and PEs (Fundamentals)
March 21, 2017
The Arrow Insights Quality Value Momentum Index (AIQVM) is a diversified composite of 50 U.S. stocks ranked highest when measured on quality + value + price Momentum factors within an equity universe of about 3,500 firms. Figure 1 plots the 12-month price-to-earnings ratio (PE) for the S&P 500 Index (SPX, middle panel - red line), the 120-month trailing mean PE for the index (NPESP) and the price trend of the index (top panel, green and black lines). The bottom panel shows the trailing 48-month correlation of SPX and NPESP or SPX:NPESP. SPX and NPESP were in sync during the bull markets of Sep 1934-Oct 1943, Nov 1958-Mar 1972 and Apr 1986-Jan 2002. However, for most of the present bull market they have not been in sync (Aug 2008 - May 2016) The NPESP:SPX correlation went positive on May 31, 2016 and has remained so.
When SPX and its normalized PE are in sync, fundamental quality and value factors are the primary drivers of stock prices. AIQVM has bested SPX since 1999, primarily because it held a concentrated portfolio of stocks that were rewarded for sounder economic fundamentals than the capitalization-weighted index. For most of this period, fundamentals mattered to investors. Fundamentals mattered less to investors from May 31, 2013 through May 2016 when SPX:NPESP was extremely negative (bottom panel, Figure 2), which was when AIQVM underperformed SPX by a wide margin (Figure 3).
InFocus Highlights: (all time periods end on February 28, 2017)
- Since Dec 31 1999, AIQVM and SPX record cumulative returns of 229% and 61% (Figure 2).
- AIQVM and SPX return 9.3% and 28.6% from May 2013 – May 2016 (Figure 3).
- Since May 2016 SPX:NPESP has climbed, AIQVM and SPX are 14.9% and 12.7% (Figure 4)
Figure 1. S&P 500 & SPX PEs – Dec 31 1925 to Feb 28 2017
Figure 2. AIQVM, S&P 500 & SPX PEs – Dec 31 1999 to Feb 28 2017
Figure 3. AIQVM & S&P 500 May 31, 2013 to May 31, 2016
Figure 4. AIQVM & S&P 500 Since May 31, 2016
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