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Over to The Veteran for today's note.
He's talking factors for Q4 👇👇👇
US equity markets finished the month of August with decent gains.
Fears over the market's reaction to the Federal Reserve's plans to taper its QE program now look largely unfounded following a weak Non Farm Payrolls print.
August is often a very uneventful month for the markets and though last month didn’t seem that exciting, a look at some of the statistics around its performance shows us a different story...
And suggests that investors can be optimistic about the final three/four months of the year.
Global equity markets are now valued at a record $118.6 trillion dollars, according to Bloomberg data, with $2.8 trillion added to valuations just in the last week of August.
August saw the S&P 500 make its 50th and 51st new all time highs during 2021.
There were 10 new all time highs in August alone.
That's the highest number seen in August since 1929, and well above the 7 new highs registered in August 2019, something that was flagged in recent research from wealth manager LPL Financial.
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The research highlighted how well the S&P 500 is performing compared to prior rallies having equaled, and subsequently exceeded 1995’s tally of 51 new all time highs by the end of August.
It also matched the all-time record of 52 new highs in the first 8 months of the year, which occurred in 1964, one of only two years to have registered 50 new highs in the first 8 months of trading, the other having been 1995.
The S&P 500 has also posted news highs in each of the last 8 months and is therefore on course to match 2014’s record of new all time highs in each of the 12 calendar months.
In both 1964 and 1995 the index went on to post additional gains in the final quarter of the year adding +3.6% in 1964 and an impressive +9.6% in 1995.
LPL Financial also analysed the performance of the S&P 500 in all years which saw more than 30 new all time highs through the end of August. In all but one of these years the index went on to post above average returns in the last quarter.
The one exception was 1987, when in the face of a global stock market crash the S&P 500 lost just over -25% in the final quarter of the year.
The fact that both 1929 and 1987, years that both saw significant crashes, crop up in the performance data serves to remind investors that markets are rarely one way bets and we should always factor that reality into our thinking and investment strategy.
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However, the omens for continued gains in equity markets are positive.
Q2 earnings were very upbeat with +87% of the S&P 500 companies that had reported by Mid August, posting earnings and revenue beats.
A figure that is well above the 1-year average of 74% and the five year average of 65%.
In fact the 87% figure is a new record, eclipsing the 79% revenue beat rate of Q3 2020.
What’s more S&P 500 stocks achieved a blended earnings growth rate of 89.3% according to numbers from FactSet. This is the highest quarter over quarter growth rate seen since the 109.1% posted in Q4 2009.
Not only is the percentage of companies producing positive revenue in Q2 a record, the percentage by which they beat Wall Street revenue forecasts has also set new records coming in at +4.9%, compared to the trailing one year average of +2.8% and the five year average of just 1.2%.
The biggest revenue beats were found in the Energy, Communication Services, Consumer Staples and Information Technology sectors. As this chart of sector revenues growth in Q2 2021 shows us.
US Q3 earning seasons does not get going until Mid-October, however, we can look to August for some clues as to which sectors and style attributes or factors may outperform this month...
The chart above shows selected factor performance in August and over the YTD to the end of last month.
It comes as no surprise that high beta stocks are the best performers year to date as they naturally follow the index higher.
Beta can be thought of as a stock intrinsic sensitivity to change in the underlying index or sector which it is a constituent.
However, despite the impressive performance that the S&P 500 put on in August (as we highlighted above) the high beta factor was not the top performer in August (it finished 7th overall) rather it was pure growth which was closely followed by momentum and growth.
Pure growth is just a more concentrated version of the well established growth factor.
For a primer on factor investing see this link:
A factor that performed well in August and over the year to date has been share buybacks, a style that is up +29.90% YTD and by +3.70% during August, but the share buyback factor has also outperformed over the last 52 weeks as well as we can see below
Back in December 2020 both Reuters and the Wall Street Journal highlighted the fact that cash and near cash investments, held by non financial and non utility companies, had leapt by 30% to figure of $2.50 trillion, a new all time high.
Given that US corporations are increasing their earnings per share in 2021 through rapid margin growth (see the chart above) cash balances are likely to be growing again and it will be very tempting for the c-suite execs to bolster their share prices by spending some of that money to buy up more of their own stocks.
It's also interesting to note that a reduction in share count or the number of shares outstanding has been the smallest contributing factor to EPS growth in 2021.
Perhaps that's about to change...
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