Quarter in Review
Domestic equities captured their best performance since 1998. Their dramatic retracement took many by surprise, given the events that impacted the global economy during the first quarter.
Overall, U.S. equities (as measured by the Russell 3000 Index) advanced 22.03% during the quarter. Small caps led the way as the Russell 2000 increased 25.42%. Large caps continued in a similar manner as the Russell 1000 rose 21.82%.
Outside the United States, the performance of foreign equities was more than respectable as the MSCI All-Country World Index ex-USA advanced 16.12%. It was the best performance for this index since the third quarter of 2009.
Contrast this with the negative returns experienced during the first quarter. Recall U.S. equities declined 20.90% while foreign equities dropped 23.36%. Even with the performance of equities during the second quarter, both U.S. and foreign equity benchmarks exhibit year-to-date negative returns of 3.48% and 11.00%, respectively.
Markets are forward-looking. When considering opportunity, we contemplate the drivers and sustainability of performance.
On a style-orientation basis, Growth continues to outperform Value in both domestic and foreign markets. A key aspect of this trend is attributed to the underlying composition of benchmark indices. Within the Russell 3000 Index, Information Technology is the largest sector. The weight of this sector within this index has increased since the end of 2019 to 26.57% from 22.38%. This sector’s year-to-date performance was 15.29%, well above the broader index’s negative return.
The underlying companies within this sector continue to rise in overall market capitalization relative to the broader market. This rise has been accelerated as investors migrated to companies they believe are best positioned to succeed within the current environment. As such, the valuations of companies like Microsoft, Apple, Adobe, NVIDIA and PayPal have surged during 2020. This factor of “price momentum,” or the rate of change in the price of a company over a measurable period, has sustained the relative strength of this sector. Price momentum has been a contributor to the overall relative performance of Growth over Value. While one can argue with the crowding of this “trade,” investors tend to lose when they “fight the tape.”
One notable factor, somewhat fundamental in nature, is the trend in analyst revisions. During the first quarter, the trend in the revision of estimates by analysts turned downward as analysts aggressively adjusted their outlooks given the pandemic. According to Refinitiv, during the latter part of March, 89% of analyst revisions were downward versus 11% upward. Contrast the latter to the current environment where upward analyst revisions of 59% outpace downward revisions of 41%. Additionally, positive revisions momentum has been evident within the United States, Canada and specific eurozone countries, in addition to China.
According to FactSet, for the remainder of 2020, the revenues and earnings of publicly traded companies are anticipated to contract year-over-year. This implies valuations, as measured by the forward P/E (price-to-earnings ratio for the next 12 months) may be inflated versus historical measures. Domestically, the forward P/E for large-cap stocks stands 22.3x versus a historical average of 18.9x. Foreign developed equities exhibit a forward P/E of 17.1x versus a historical average of 16.1x.
Opportunity exists within the equity landscape given low interest rates coupled with the fiscal and monetary actions to restore the global economy. While we continue to anticipate higher volatility, we remain confident equities continue to warrant consideration.
We believe our proprietary process provides opportunity for success, specifically within the current environment. We believe investors will prefer the liquidity associated with domestic large caps. Our bias remains toward domestic equities over foreign, favoring domestic large caps over small caps.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.