Quality Basket vs Broad U.S. Equity Market
rising rates and the highest value in growth-to -value ratio since 2000, the
Arrow Insights Quality Value Momentum Index (AIQVM) continues to beat the
S&P 500 Index (SPXTR) and S&P 500 Equal Weight Index (SPXEW) in 2018
(Figure 1). AIQVM is up nearly 7% since April 30, 2018.
investors keep their ears to the ground to see if the approaching train has a
firm grip of the rails. Bear markets are usually preceded by 9-to 12-month
periods of narrow market leadership, wherein most of the S&P 500’s positive
return is driven by a narrow segment of the stock market. Year-to-date, the
ProShare S&P 500 Ex-Technology ETF (SPXT) is up only 1.7% while the S&P
500 ETF (SPY) is up 4.7%, so SPXT is lagging SPY by 3.04% in 2018 (bottom
panel, Figure 1).
Figure 1–Year-to-Date 2018 Through June 15
This performance occurs while the year-over-year Consumer
Price Index is near 2.8% and the Atlanta Federal Reserve’s (Fed’s) GDP forecast
is at 4.8%. Inflation is well above the Federal Reserve Bank’s 2% target
(middle panel, Figure 2). Economic growth in 2018 is also much stronger than the
Fed’s expectations at a time when the unemployment rate is at 3.9%. These
factors make it likely that the Fed will hike the Fed Funds Rate three to four
more times in 2018.Three or more hikes enhance the odds that the 3-Month U.S.
Treasury yield will “invert.” Inversions occur when this yield exceeds the
10-Year US Treasury Yield; the yields are near 1.9% and 2.9% respectively. On a
median basis, historically, inversions have occurred eight months before a
SPXTR and SPXEW record the
growth of $100 to $312 (a total return of 412%) and $311 (a 411% total return) while
AIQVM records $354 (a 454% total return) from May 1, 2003 through June 15, 2018
(Figure 2). They all decline about nine months after the yield inversion begins
Figure 2–AIQVM, SPXTR, SPXEW & TB3 to UST10Y Ratio–Since
May 1, 2003
The technology-dominated NASDAQ 100 Index’s (NDX) has surged
13.4% this year. Much of NDX’s surge is driven by Amazon’s 47% climb. The
online giant’s shares are worth $836 billion, about a 10% of NDX’s market
capitalization. Without Amazon, NDX’s technical strength would be even weaker
than is evident with both the bullish percent and the percent of stocks within
NDX at 70 and below 70, respectively (bottom panels in Figure 3). Bull markets
often die with readings below 70.
AIQVM’s allocation to technology stocks is
about 14%, while it is close to 24% for the S&P 500 Index. So, it may not
be as severely impacted by a pullback in this sector. Next week’s InFocus will cover AIQVM and the S&P
500’s growth stock-to-value stock ratio, which is near the peaks last seen in
1999-2000 (Figure 4). Technology stocks are also leading the S&P 500’s
Growth Stock Index.
Figure 3–The NASDAQ 100 Since 1999 & Current Technical Weakness
Figure 4 – AIQVM, Value & Growth–Since
Dec 31, 1999 Through June 15, 2018
Inversions and narrow market leadership are
onerous at a time when the Fed is hiking rates because these factors are often preludes
to a recession. And a recession has always been a prelude to our worst bear
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AIQVM: A.I. Quality Value Momentum Index
(AIQVM) selects common stocks pursuant to a proprietary
selection methodology that is designed to identify Tri-Factor™50, the
leaders with the strongest fundamental performance characteristics. The index
live date is July 31, 2014, with an inception base – date of June 30, 1992.
Index data prior to the live date is hypothetical.
HYPOTHETICAL RESULTS ARE BASED
ON CRITERIA APPLIED RETROACTIVELY WITH THE BENEFIT OF HINDSIGHT AND KNOWLEDGE
OF FACTORS THAT MAY HAVE POSITIVELY AFFECTED ITS PERFORMANCE AND CANNOT ACCOUNT
FOR ALL FINANCIAL RISK THAT MAY AFFECT THE ACTUAL PERFORMANCE OF THE FUNDS. NO
HYPOTHETICAL PERFORMANCE RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF
FINANCIAL RISK, INVESTOR BEHAVIOR, OR OTHER MARKET FACTORS – ANY OR ALL OF
WHICH CAN IMPACT ACTUAL PERFORMANCE RESULTS. THERE ARE OFTEN VAST DIFFERENCES
BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND ACTUAL PERFORMANCE. NO
REPRESENTAION IS BEING MADE THAT ANY COMBINATION OF INVESTMENTS WILL ACHIEVE
SIMILAR PERFORMANCE RESULTS TO THOSE ILLUSTRATED.
and its affiliate companies conduct business related to securities covered in
its research reports, which may include market making and specialized trading,
risk arbitrage and other proprietary trading, fund management, and investment
services. Arrow Insights makes every effort to use reliable, comprehensive information,
but we make no representation that it is accurate or complete. We have no
obligation to tell you when opinions or information in this report change apart
from when we intend to discontinue research coverage of a subject company.
by Arrow Insights research personnel are based on public information. Facts and
views presented in this report have not been reviewed by, and may not reflect
information known to, professionals affiliated with Arrow Insights. Chart
courtesy of http://www.StockCharts.com
Past performance is not a guide to future
performance. Estimates of future performance are based on assumptions that may
not be realized.