Navigating Conflicting Data
Ask a CIO #20
It’s remarkable how much information we have at our fingertips. It’s perhaps even more remarkable how quickly new information is disseminated.
When it comes to markets and investing, the amount of data that is published, sliced and diced, and opined upon can feel almost endless. On the one hand, the quantity, quality, and ease of accessibility to data helps level the playing field for all investors.
On the other hand, the aggregate data rarely leads to a consensus view and can very quickly become confusing. This week’s discussion is a recognition that perfect clarity doesn’t exist.
You’ve written a few times about the U.S. equity market, especially the S&P 500 Index. Given the current market conditions and relative valuation metrics, the S&P 500 appears overvalued. Why is your outlook more optimistic?
If I’ve given the impression that I’m unconcerned about or ignoring the potential market warning signs, that would be a miscommunication on my part.
To change things up a bit this week, let me share below a collection of charts, with some light commentary, pulled from various sources. These charts reflect and validate much of what you’re expressing.
Point 1: U.S. equity market performance has been dominated by a handful of companies. This concentration is reflected in:
1) how few companies have been outperforming the S&P 5001;
and 2) how much the S&P 500 Index (which is capitalization weighted) has been outperforming an equal-weighted index of S&P 500 companies.2
Point 2: Small cap equities are cheap relative to large cap equities, across a variety of metrics.3
Point 3: Non-U.S. equity markets are cheap relative to U.S. equity markets.4
Let me now clarify – I agree with these assessments. I agree that it’s concerning that equity markets have been dominated by a handful of large cap companies. It doesn’t make for healthy market dynamics. Along those same lines, I agree that small cap equities appear to be very cheap relative to large cap peers. And I agree that the U.S. equity market broadly is richly valued relative to non-U.S. equity markets.
And yet.
Counterpoint 1: Earnings have been resilient.5
Counterpoint 2: S&P 500 earnings growth has outstripped non-U.S. counterparts.6
Counterpoint 3: It is unwise to use market valuations as a signal for market timing.7
As a side note on small cap equities, when considering the potential risk of a recessionary environment, the S&P 500 Index has historically outperformed small cap equities during those periods. Post-recession, however, the trends often reverse.8
That’s the challenge inherent to investing. We generally need to make decisions with incomplete and often contradictory information. And there is always so much noise in the broader macro backdrop.
I’m not necessarily taking an optimistic view on the S&P 500 Index. I simply believe that exposure to the broad U.S. equity market should be considered as part of an overall investment framework and can serve as a key piece of a larger, multi-asset class portfolio.
Your views and how you incorporate them into your portfolio may differ significantly. But, as I’ve highlighted before, picking a set of broad guideposts, aka your asset allocation framework, is a really valuable exercise. At the very least, it will help you avoid whiplash and/or confusion from the constant stream of news and conflicting data points.
Hopefully that clears things up a bit! As always, feel free to reach out: askacio@ivyinvest.co.
Until next week,
Wendy
Source: JP Morgan, Eye on the Market, September 2024
Source: JP Morgan, Eye on the Market, September 2024
Source: JP Morgan, Eye on the Market, July 2024
Source: Meketa, The Art of Patient Investing, July 2024. Although the chart ends here in April 2024, the relative value relationships continue to hold, with the U.S. P/E ratio still meaningfully higher than that of international markets.
Source: New York Life, Macro Pulse, October 2024
Source: Meketa, The Art of Patient Investing, July 2024
Source: New York Life, Macro Pulse, October 2024
Source: JP Morgan, Eye on the Market, July 2024