Inflation and Relative Strength Investing: May CPI numbers increased the most they have on a month-over-month basis since the 2008 timeframe. The Fed has also recently provided guidance moving up their timeline of interest rate hikes because of inflation picking up quicker than expected. While the impacts to consumers are pretty clear, what does an increase in inflation mean for investors? In this webinar on Tuesday, June 29^th, we will explore some key areas of the market that have shown strong growth potential, and which areas of the market may be poised to participate in an inflationary environment. Click here to register.

Speakers:

• James West, CFA - Manager of Asset Management Research
• Jay Gragnani - AVP Asset Management Research

Beginners Series Webinar: Join us on Friday, June 25th, at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Using the Dashboard & Account Preferences. Register Here.

If only paying attention to the media you may think the market has been on a roller coaster ride in the first half of 2021, and while parts of that may be true, it probably does not look as expected. Yes, there was/is a rotation from growth to value (and perhaps in reverse at times), and yes, we have seen material sector rotation. The Nasdaq corrected, as well as Small Caps. We experienced volatility in fixed income given changing expectations for monetary policy, also within commodities because of shortages; however, year-to-date (12/31/2020 - 6/23/2021) the S&P 500 (SPX) has seen a maximum drawdown of just 4%. Drawdown, by our calculation, is simply measuring the maximum distance (percent) from the market’s peak to trough on a forward rolling basis. We only used closing values for our study, which means the notable intraday swings we’ve seen this year are not accounted for, but nonetheless, this remains an interesting data point. In fact, should this hold, it would be the smallest drawdown since 2017 which saw a max of just 2.8%. Prior to 2017, you would have to go all the way back to 1995 to see a maximum calendar year drawdown beneath 5%. The table below shows max calendar year drawdowns for the S&P 500 since 1990.

Given we are only halfway through 2021, we looked to see if small first half drawdowns tended to “mean revert” with a larger drawdown in the second half of the year. In short, we did not find empirical evidence to support this, meaning that one should not expect a rocky second half just because of a “quiet” first six months. The table below shows the first and second half maximum drawdowns for the S&P 500, labeled accordingly on the right-hand side. Note that second half drawdowns (shaded yellow) are shown on an absolute basis, meaning they were negative figures.

As of the close on Thursday, there are just four trading days left in the first half of the year.  Year-to-date (through 6/23) the S&P 500 SPX has gained 12.93%. It seems that anytime the market has substantial gains during the first half of the year, questions like “How much does it have left in the tank?” or “How much higher can it go?” inevitably arise. Such questions are natural – we’re conditioned to expect a pullback following any significant run up and you can usually rely on the financial media add fuel to the fire. As it turns out, however, historically when there’s been a strong start the year, that trend has continued in the second half of the year more often that it has reversed.

The image below is an excerpt from the Informed Investor. It found that since 1928, when the S&P returned 10% or more during the first half of the year, during the second half of the year its has posted average and median gains of 6.9% and 9.1% respectively.

In order to get a more granular perspective, we have broken out the first half, second half, and calendar years returns for every year in which the S&P 500 returned 10% or more during the first half of the year (displayed in the table below).

We found that since 1928, the S&P has generated a gain of 10% or more during the first half of the year 27 times. Of those 27 years, there have only been seven occasions, slightly more than 25% of the time, when the S&P has followed up a 10%+ gain in the first half of the year with a negative return in the second half of the year. The most recent occurrence was in 1987, when the S&P gained 25.53% during the first half of the year and then went on to lose -18.72% in the second half, which of course included the Black Monday crash in October. 1987 was actually the second year in a row that the S&P gained more than 10% in the first half of the year and then lost ground down the stretch. In 1986 the index posted a gain of 18.72% through the first six months and was then down -3.46% during the second half, finishing the year with a respectable gain of 14.62%.

Only once has the S&P 500 gained more than 10% during the first half of the year and then had a second half that was bad enough to push it into negative territory for the year. As you may have already guessed, that year was 1929. The S&P was up 12.57% in the first half of ’29. But then lost -21.74% in the second half of the year, which included Black Tuesday and the start of the Great Depression.

In fact, with the exception of 1987 and 1929, which each had historic market meltdowns during October, every year in which the S&P has gained more than 10% during the first half of the year, it has finished the year with a double gain of 10% or more. Outside of '29 and '87, the lowest calendar year return for a year that started with a 10%+ gain in the first half was in 1988 when the S&P gained 10.69% to start the year and added 1.54% in the last six months bringing its total gain for the year to 12.40%. 

On the other end of the spectrum, there have been 12 times when the S&P gained 10%+ in the first half and followed that up with a double-digit gain in the second half of the year. The S&P just narrowly missed accomplishing this in 2019, when it gained 17.35% in the first half and 9.82% in the second half, just shy of the 10% mark. However, we don’t have to go back much further to find the last time this occurred – in 2013 the index gained 12.63% from January through June and then gained steam, posting a gain of 15.07% in the second half of the year, to finish the year up 29.6%. The best second half finish, following a 10%+ start came in 1954, when the market gained 17.73% during the first six months and then gained momentum, adding another 23.18% in the second half, bringing the calendar year return to 45.02%, which is also the best single-year return for the S&P since 1928. 

So, while it may provoke worries about a potential second-half hangover, the data shows that historically, a strong performance in the first half of the year has more often continued into the second half. 

The resurgence in technology on the Asset Class Group Scores (ACGS) page has continued over the past week as the technology group advanced north of the 4.00 score threshold for the first time since April. Prior to this year, the group had largely remained in a high field position since mid-2016, with the exception of the broader market declines that occurred in late-2018 and March 2020. The recent fall from grace for technology began in late February as the group declined from a score above 5.00 to hover near the 4.00 score line by April. After a few weeks of stagnation, the group score moved south again to near the 3.00 score line by mid-May. Since that time, the score for technology has improved by more than a full score point to its most recent reading of 4.12. Advancements of a full point or more in group score have not occurred all that frequently for the technology group and certainly adds to the positive weight of the evidence for further sector improvement. The current level is in line with levels from the April stagnation, making it an important threshold to monitor for a sustained move higher.

The more focused internet group was hit harder in the most recent technology decline, as the group fell from a score north of 5.00 in late February to a low reading of 2.44 in May. The group has shown significant improvement over the past six weeks to reach a recent score posting of 3.46, gaining over a full score point in a similar fashion to the broader technology group. While the focused nature of the internet group generally leads to more volatility in score, the two technology groups are more distant from one another than we saw throughout most of the pandemic recovery trade. When looking at historical score movement between technology and internet, we can see that the internet group has a tendency to show further deterioration while the groups are falling in score, but often shows a rapid score increase once the two groups start to rise from near-term lows, ultimately catching if not surpassing the broad sector group.

As previously mentioned, the internet group does not include all that many funds, with 19 ideas currently depicted on the ACGS page. Most of the ETF representatives focused on domestic equities are actually scoring in high field position with scores north of 4.00, while the lower scoring funds are those with global or international equity exposure. One domestic fund that has shown significant recent improvement is the Invesco Nasdaq Internet ETF PNQI, which advanced Thursday to break a double top at $255. This fund reached an all-time high at $260 in February before moving lower with the broader technology decline but has since rebounded to sit one box shy of its all-time high. This price appreciation has led to a recent score posting of 5.40, which bests the average internet fund (3.46) as well as the average US large cap growth fund at 3.87, and is paired with a strongly positive 2.34 score direction. It is important to note that the fund is nearing overbought territory and on a rather significant stem following movement Thursday. As such, those looking to add exposure may look toward easing in at current levels or waiting for a potential pullback/normalization of the trading band. Initial support can be found at $220, which has held on two previous occasions in February and May of this year.

Daily Option Ideas for June 24, 2021