Examining sector and factor performance in the third quarter of 2016

High beta, value factors among the star performers, while low volatility lags amid heightened appetite for risk

Nick KalivasThe high beta, value and size factors outperformed the broad-market S&P 500 Index by a sizeable margin during the third quarter, with the S&P 500 High Beta Index gaining 12.18% during the three-month period – outpacing all other factor indexes. The S&P 500 Index rose a healthy 3.85%, but 14 smart beta strategies and two smaller-cap indices – the S&P SmallCap 600 Index and S&P MidCap 400 Index – all outperformed the broader market.1

There was a nearly 14.70% total return gap between the best-performing factor (high beta) and the poorest-performing factor (low volatility) during the third quarter. This dispersion was greater than the second quarter’s performance gap, but less than that of the first quarter, which saw significant market volatility. Year to date, there has been an even wider performance chasm from top to bottom, with the NASDAQ Dividend Achievers 50 Index up 22.6% and the Russell Top 200 Pure Growth Index down 0.22%.1 This dispersion underscores the differentiated return streams of factor-based strategies.

Factor performance by quarter in 2016


Short-term foreign bank debt presents attractive value

US money market reform is driving an uptick in rates and creating market opportunities

Simmons_Lucas_se_150dpi_RGBMoney market interest rates have spiked in recent months in a number of different US money market segments. Short-term US dollar Libor rates, rates on municipal money market instruments and even rates on short-term foreign bank debt are currently higher than we have seen for some time.

US money market reform drives rising money market interest rates


On second thought: Saudis under pressure to reverse course and cut crude oil production

Potential deal with OPEC could buoy crude oil futures and provide investor opportunities

Bloom Jason_sm_150dpi_RGBThe Organization of Petroleum Exporting Countries (OPEC) has been in existence for nearly 60 years. OPEC is the textbook definition of a cartel, but cooperation between member nations has been inconsistent. OPEC’s production targets have generally served as a gentlemen’s agreement, with member nations often prone to producing more than their allotted quota of crude oil.

Two years ago, Saudi Arabia formally abandoned production targets and began pumping massive quantities of crude, which was seen as an attempt to regain market share lost to rapidly growing North American shale producers. Since then, lower crude oil prices have forced shale producers to cut over one million barrels of daily US crude oil production.

But the shale industry responded with grit and ingenuity –


Emerging market bonds: Investing with conviction in volatile markets

When market prices and fundamentals are misaligned, opportunities may become available

Jason Trujillo

As a young Army paratrooper, much of my training was focused on learning to operate under chaotic circumstances. The battlefield is nothing if not chaotic, especially in the pitch black of night, which is how we often trained.  Initially, I found this to be highly stressful, as I had only a vague sense of what was going on and what I was supposed to be doing. Fortunately, the 82nd Airborne Division had many “understanding” leaders who were extremely eager to provide some “gentle guidance” to help square away a new soldier. After a bit of this “gentle guidance,” I became increasingly comfortable operating within the chaos – gaining a clearer sense of the battlefield, what my job was, how that job fit into the unit’s broader mission and, very importantly, how to use my equipment (trust me, moving around with night vision goggles is a lot harder than it seems in the movies). With time, I began to view the chaos that is endemic to the battlefield not as a source of stress, but rather


Are dividend stocks overvalued?

A dividend strategy that includes a low volatility screen may help ease investors’ valuation concerns

Boccellari_Thomas_sm_lowrezRecord-low interest rates have pushed some income-oriented investors into risky asset classes as a means of increasing both yield and total return. This has helped equity market valuations reach levels not seen since the recession of 2008. The chart below depicts the forward price-to-earnings (P/E) ratio for the S&P 500 Index over the trailing five years through Aug. 31, 2016.

Equity valuations climbing


The case for floating rate securities in a rising interest rate environment

High-quality, floating rate securities could provide a hedge against rising rates

james-meyers-photoFixed income investors have been awakened from their summer doldrums by a variety of factors that have increased US interest rate volatility.

What’s driving higher interest rates?

First off, the perceived probability of a US Federal Reserve interest rate hike has increased in response to hawkish members of the Fed’s Federal Open Market Committee. In fact, as of this writing, traders have assigned a roughly 50% probability of a Fed rate hike by the end of 2016 based on fed funds futures markets.1

Secondly, central banks in key developed markets, including Europe and Japan, have


Examining low volatility’s performance in various market environments

Rates, volatility and a broad market rally have contributed to the factor’s late-summer slump

Nick Kalivas

Late summer has not been fruitful for the low volatility factor. From July 6 to Sept. 9, the S&P 500 Low Volatility Index has fallen by 4.67%, while the S&P 500 Index gained 1.70%.1 This is in sharp contrast to the second quarter, when the low volatility index returned 6.75%, and the broad-market index returned 2.46%.1 Naturally, some investors are wondering what’s behind the shift.

Looking at market conditions during late summer, I see three headwinds that were working against the low volatility factor:


Energy and financials: The keys to a value resurgence?

Why these two sectors may be critical for value to outperform growth

Kevin HoltThe Russell 1000 Value Index has generally underperformed the Russell 1000 Growth Index for the past decade, on average.1 Naturally, this leads to questions about when the tide may turn back in favor of value. Below, I highlight two of the key factors that I believe will influence performance during the next few years.

Finding opportunity in energy and financials


Federal Reserve plays it safe on interest rates in September

Bond markets appear ready to absorb a December interest rate increase

James Ong

The Federal Reserve (Fed) did not hike interest rates today. Growth and inflation conditions in the US certainly fit the Fed’s stated parameters for a hike; however, the Fed is not one to surprise markets, and markets would have been very surprised by a rate hike today. In the minds of Invesco Fixed Income, the most likely outcome was for a somewhat hawkish statement to prepare markets for a likely December hike. We think that message was delivered.

Bond markets are currently pricing in around a 60% chance of a rate increase in December.1 We believe markets should be able to absorb a December rate increase if it materializes — risk markets appeared to trade relatively well immediately following the Fed’s statement, and attaining a 100% probability of a rate hike in December would not entail too much in the way of bond market moves in the coming months, in our view. In other words, we believe


Stock valuations are elevated, but are current prices unprecedented?

A look back through time suggests otherwise — particularly when interest rates are taken into account

Nick Kalivas

In recent months, questions about equity market valuations have flooded my desk. The rising price-to-earnings (P/E) ratio for the S&P 500 Index and the run-up in equity prices seem to have shaken investor confidence in future returns. With this in mind, it is worth considering equity valuations from a historical perspective.

A historical look at equity valuations shows wide variation