The June 2021 June consumer confidence index leaped to 127.3 from 117.2 in May, an over 8% increase month-over-month. The index measures how optimistic or pessimistic consumers are about the state of the economy through spending habits. The benchmark value for the index in order to be viewed as positive is 100, the beginning value when the index began in 1985. The confidence index’s rally above the 120 level is the first time since February of 2020 when the index ended a 32-month consecutive period with a reading above 120. The June increase in consumer confidence also comes after an over 20% increase in March, which was the largest month-over-month increase since November of 2011.

Considering the rally above 120 by the consumer confidence index, we examined the broader asset class and sector performance during the periods within the last 10 years that the index has had monthly readings above 120.  From an asset class standpoint, international equities experience positive performance in March 2017, but for the preceding roughly three-year period beginning in July of 2017, domestic equities and fixed income were the only asset classes to outperform even our cash representative. Most notably, this period of high consumer confidence and positive performance by our domestic equity proxy encompasses a time in which domestic equities was the top-ranked asset class. From a sector view, technology and consumer discretionary exhibited the highest level of positive performance during March 2017 and from July 2017 to February 2020. It is worth noting that during that three-year period, 8 out of eleven sectors showed positive performance. The only sectors in negative territory over this time were energy, telecom, and materials.

While we have no way of knowing if consumer confidence will remain high for the foreseeable future – much less for the next 30+ months – we can gather from the performance table that technology and consumer discretionary may be the sectors to watch if consumer confidence is able to remain at elevated levels.  

The Federal Reserve announced last week that large banking institutions underwent a stress test and passed easily with many well above the required capital requirements. Riding on the coattails of the announcement, many large American banks announced they would increase dividends and/or share buybacks Monday, June 29th. For much of the year financials, and in particular banks, have exhibited strong signs of relative and absolute strength for the most part despite some shorter-term weakness over the past month. Most analysts did anticipate banks hiking dividends and share buybacks before the announcement, but the announcements were larger than expected. Morgan Stanley doubled its dividend as well as committing $12 billion to share buybacks until 2022, JPMorgan Chase raised its dividend by 11%, Goldman Sachs plans on boosting its dividend by 60%, Wells Fargo plans to double its dividend, and Bank of America will raise its dividend by 17% (CNBC).

All of the banks above are acceptable to buy and/or hold as all have tech attributes of 3 or above. One in particular that has a strong trend chart that is actionable is J.P. Morgan Chase (JPM). JPM is currently a 5 for 5’er that offers support at $148. The stock is actionable at current levels, trading in slightly oversold territory with a weekly overbought/oversold reading of -23%. J.P. Morgan also has the second-highest projected yield on the list of 2.60%, only behind Morgan Stanley.

• IndexIQ releases an actively managed ESG bond ETF.
  • The IQ MacKay ESG Core Plus Bond ETF (ESGB) invests 80% of its assets in ESG corporate and government bonds as well as asset-backed and commercial mortgage-backed securities.
  • ESGB is starting with an expense ratio of 0.39% until August of 2022 and then will hike it up to 0.82% thereafter.

• WisdomTree debuts a momentum growth ETF.
  • The WisdomTree U.S. Growth & Momentum Fund (WGRO) follows an index by O’Neil Global Advisors which tracks stocks with more than $250 million in market cap and selects 50-100 stocks that have long-term momentum and short-term mean reversion characteristics.
  • The underlying index reconstitutes monthly.
  • WGRO carries an expense ratio of 0.55%.

• Janus Henderson releases an actively managed real estate ETF.
  • The Janus Henderson U.S. Real Estate ETF (JRE) will overweight subsectors that were poised for growth before the pandemic.
  • The fund will also underweight subsectors like brick-and-mortar retail assets that have long-term downside.
  • JRE carries an expense ratio of 0.65%.

(Source: etf.com)

This year, the dominant theme in the US equity market has probably been the reopening or “reflation” trade. The hallmark of this trade has been a resurgence in areas of the market that had underperformed during the COVID-19 shutdown and are expected to benefit the most from the resumption of normal economic activity. This theme has been exhibited in the general outperformance of small cap over large, value over growth and at a sector level by strong gains from areas such as energy, financials, and consumer cyclicals. It has also been characterized by an underperforming technology sector, which had been the best performing sector of the market during the COVID shutdown and had led the DALI sector rankings almost continuously for the last few years.

However, recently there has been evidence that the technology sector may be turning around. After hitting a multi-year low around 3.1 in May, the average fund score for the technology group, within the Asset Class Group Scores (ACGS), has rebounded and crossed above the 4.0 threshold earlier this month and now has continued higher to its current level of 4.33. Its average group score places technology second among the macro sectors behind energy, and seventh out of all 135 groups in the ACGS system. Within the DALI sector rankings, which tend to move a bit more slowly than the Asset Class Group Scores, the technology sector remains in the middle of the pack in fifth place, however, we have seen the sector’s buy signal tally stop falling and pick up a few signals over the last few weeks.

We’ve also seen another shift in the existing dynamic, albeit over the very short-term. Since 6/15, following the Federal Reserve’s June meeting when members of the FOMC increased their median projection for interest rates in 2023, we have seen outperformance by large stocks, especially those in the mega cap category. Between 6/15 and 6/28, the Invesco S&P 500 Top 50 ETF XLG has gained 1.88% outperforming, while the S&P 100 ETF OEF gained 1.60%, and the S&P 500 SPX has returned 1.04% over the period. Meanwhile, the S&P iShares Russell 2000 ETF IWM is up just 0.03% over the same period. Of course, this cannot be completely separated from sector themes. As we mentioned above, the technology sector has gained relative strength recently and it is also home to many mega cap stocks. The technology sector accounts for 37.7% of XLG, while it’s only around 27% of the S&P 500.

Over the same period, there has also been stronger performance by companies with stronger balance sheets. The table below shows the average (equal weighted) performance for stocks in the S&P 500 (excluding banks) broken out by their ratio of cash and short-term investments to short-term debt. We can see that generally as the ratio of cash and short-term investments to debt increases performance also rises. On average, stocks with a ratio of less than 1.0, i.e. their short-term debts exceed their short-term assets, have returned -1.64%. Meanwhile, at the other end of the spectrum, those with a ratio greater than 9.0 have returned 1.12% on average.

The items we’ve outlined above – the technology sector gaining relative strength, large/mega cap stocks outperforming their smaller counterparts, and stronger performance by firms with better debt profiles – indicate that investors may be adjusting their equity positions away from some of the more speculative areas of the market toward larger more mature stocks with more stability. Bear in mind, however, that in each case we’re talking only about very short-term events that shouldn’t be taken as an immediate call to action, but warrant our attention to see if they develop into sustained trends.

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Daily Option Ideas for June 29, 2021