Upcoming Webinar: Navigating Volatile Markets - Utilizing Sector Rotation with Fixed Income

Join us on Amplify's inaugural Institutional Asset Manager webinar series on June 7 at 4 pm ET. Thought leaders for BondBloxx and Nasdaq Dorsey Wright will offer perspective on:

• Why sectors matter in high yield
• How tactical allocation and sector rotation can be effective strategies for optimizing fixed-income investments
• How to apply these strategies to your portfolio through the NDW BondBloxx High Yield Sector Rotation ETF Model

Click Here to Register!

The battle between growth and value investing saw a change last week. The 3.25% relative strength (RS) relationship between the Vanguard Growth ETF VUG and the Vanguard Value ETF VTV moved to an RS buy signal following the market action on Thursday, May 18, favoring the growth representative for the first time in over a year. This relationship examines which of these two broad representatives, VUG or VTV, has demonstrated the most consistent outperformance and thereby is potentially a better investment. So far this year, the Vanguard Growth ETF has gained over 22%, significantly outpacing the Vanguard Value ETF at a -2% return over the same timeframe (through 5/22). This is in stark contrast to what we saw last year, as VUG returned -33% in 2022, much worse than the -4.5% drop from VTV.

This relative strength relationship between VUG and VTV has been extremely consistent over the years. If we leave out the initial buy signal given in December 1998, there have only been three prior signal changes; the relationship moved to favor value in October 2000, growth in July 2008, and then value in March 2022. Each of those signal changes also saw consecutive signals given in either direction.

There are many ways to examine the growth/value relationship through the technical analysis lens implemented here at Nasdaq Dorsey Wright. As we covered last week, the rolling six-month performance spread between VUG and VTV has reached an extreme level. It is rare to see VUG outpace VTV by more than 20% in six months, which has only happened on four other occasions. When examined independently, that suggests it may be prudent to look toward potential “value” in the value camp. However, it is also important to note that on three of those four prior occasions, we saw the spread widen north of 35% in favor of growth before turning back around, and two of those instances saw a spread greater than 40%. Said another way, the extended growth vs. value spread has shown the potential to become more extended once reaching the current level.

As we touched on above, the RS relationship between VUG and VTV RS has only seen four signal changes over the past 25 years, so these signals tend to last for prolonged periods of time. This RS relationship can also be used in different ways but is most helpful as an indication for further confirmation of trend establishment. Although, using it as a standalone trigger for investing in either growth or value has also proved profitable over the past two decades. To show this, we examined a hypothetical portfolio growth of $100 based on the signal changes of this RS relationship. When this chart was on a buy signal, our hypothetical portfolio owned VUG. When it moved to a sell signal, our portfolio owned VTV. As we can see below, this RS switching approach led our $100 portfolio to over $634 through the market movement Monday (5/22). While we would not suggest using this singular RS relationship to steer the value vs. growth weightings in your portfolio, the hypothetical test does show the potential effect of maintaining an objective, rules-based approach to portfolio management.

Although summer doesn’t officially begin for about another month, many Americans recognize Memorial Day as the unofficial start of the season, which is right around the corner. Many of us are looking forward to the warm weather, beach vacations, and the other usual summer activities. However, in the investment world, the summer months are associated with lackluster returns, also known as the "Summertime Blues." This year, we enter the summer months after what has been a strong start to 2023 despite poor breadth as the S&P 500 (SPX) is currently up over 9% year-to-date.

The table below shows the returns of both the Dow Jones Industrial Average and the S&P 500 during the summer months (May 31st to August 31st) back to 1981. The S&P 500 and the Dow Jones Industrial Average have each finished in negative territory in 15 of the past 41 summers (or about 37% of the time). Of those 15 down summers, there were 13 summers in which SPX and DJIA were both down at the same time. While less than half of the summers have been negative for these benchmarks, the bad summers were indeed bad, with some down double digits over the three-month period. For instance, in the summer of 1990, SPX fell -10.69%. In 1998, it saw a drop of -12.24%, but the worst summer came in 2002 during the tech crash when the index declined -14.16%. During the summer of 2008, which began a famously longer slide as SPX fell -8.39%. The market has bucked the trend over the last several years, however, 2022 was the weakest summer since 2015.

To determine if there is one month that tends to have an outsized effect on summer returns, we compiled a monthly summary of S&P 500 returns going back to 1958. What we found is that the summer months tend to have a lower median return than most of the other months of the year. It is the month of September that has historically provided the lowest median return at -0.35%, but it is followed closely by June which has a median return of just 0.08%. Notice too that the spread, i.e., the max return in a given month versus the minimum return in a given month, is relatively low for the summer months (namely June and July).  A closer look at the month of June reveals a max return of 6.89% in the last 60 years, which it posted in 2019, and which followed a May return of -6.58%. Every other month, except February, had a maximum return of more than 8%. Clearly, June has historically been one of the weaker months for SPX returns. However, we can't blame the Summertime Blues on June alone. August has experienced the second-largest drawdown (after October) at -14.56%, which compares unfavorably to the other months' minimums which seem to hover around -10%.

To take this concept one step further, we looked at four hypothetical portfolios specific to each of the four seasons. Defined as follows:

Winter Portfolio Dates: 11/30 - 2/28

Spring Portfolio Dates: 2/28 - 5/31

Summer Portfolio Dates: 5/31 - 8/31

Fall Portfolio Dates: 8/31 – 11/30

The end result? The summer portfolio greatly underperformed the other three seasons - fall, winter, and spring.  If you were to invest only during the spring months (March through May), the initial investment would have had a cumulative return of over 600% from 1958 through April of 2023 (since May has not yet completed), with an annualized return of 9.39%, making it the best performing seasonal portfolio. The winter portfolio deserves an honorable mention because it produced an over 500% return over the study period. The point of the graph below is to show that the summer months paled in comparison to the others, gaining just 87% since 1958 - that results in an annualized rate of return of only 2.89%.

There have been exceptions along the way (like the summers of 2020 and 2021), but the Summertime Blues have been a common occurrence for market participants over the last 60 years and the summer months have occasionally produced some significant down markets, like 2022. However, this does not mean that we should all simply go to cash at the end of every spring - faced between the summer market return or earning nothing by going to cash, on average, investors have ultimately been better off by taking the market return.

Daily Option Ideas for May 23, 2023