How did factors perform during a roller coaster first quarter?

Growth, momentum factors prevail after a volatile start to the year

Nick KalivasTime to read: 5 min

Equities experienced heightened volatility during the first quarter of 2018, with the S&P 500 Index surging 7.55% from Dec. 31 2017, through Jan. 26, 2018, before dropping nearly 8% through quarter-end.1 Early in the quarter, market activity was buoyed by upward revisions to corporate profit outlooks following federal tax cuts in December, coupled with a squeeze on short volatility positions.

However, this momentum eased in the final two months of the quarter as investors became uneasy over a number of developments:

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What do inventories tell us about the economy?

Declining inventories and rising industrial production may create a strong backdrop for value and momentum strategies

Nick KalivasTime to read: 3 min

One benefit of factor investing lies in the cyclical nature of factors. Because various factors tend to perform differently depending on economic conditions, investors can harness these attributes to their advantage.

For example, value and momentum stocks have often been better-suited for periods of expansion. This is because value strategies tend to invest in cyclical stocks that may benefit from faster economic growth, while momentum strategies operate under the premise that stocks with strong recent performance may continue to outperform over the near term.

It’s my view that the current inventory cycle provides a favorable backdrop for equity prices and makes a compelling case for

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Could tax reform benefit consumer spending?

Investment strategies featuring the quality factor could benefit from current trends in consumer spending

Time to read: 2 min

Advance estimates of US retail sales for December 2017 displayed vibrant year-over-year growth of 5.64%, according to the US Census Bureau.1 The most recent report, released on Jan. 12, covers sales ex-food, automobiles, gasoline and building materials. December sales growth was at its highest level since peaks in 2011 and 2014, and was above the trend seen since early 2011 — further highlighting strength in consumer activity.

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Examining factor performance during a year of concentrated gains

Market trends sparked big wins for growth and momentum in 2017

Nick KalivasTime to read: 3 min

The books are closed for 2017. It was another strong year for the equity market, with the S&P 500 Index up 21.8%. Performance was highly concentrated, with more than one-third of the S&P 500’s gains linked to technology stocks and roughly 15% of the gains coming from the financials sector. Health care came in a close third to financials, representing 14.2% of the S&P 500’s total return. Together, these three sectors accounted for more than two-thirds of the S&P 500’s gains. Conversely, energy and telecommunication services were the only two sectors with negative performance. The table below highlights each sector’s contribution to the total return of the S&P 500 Index in 2017.

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Do valuations affect the performance of the low volatility factor?

A closer look reveals that market conditions may be a more accurate indicator of low volatility performance

Nick KalivasTime to read: 3 min

In my last blog, I outlined the difficulty of valuing factors by traditional price metrics such as price-to-earnings and price-to-book ratios. Part of the problem in valuing factors is that factor-based portfolio holdings change so often and can be influenced by market conditions. I would like to expand on that idea by suggesting that market conditions can actually be a predictor of factor performance. In this case, I’d like to examine the low volatility factor.

Low volatility doesn’t adhere to traditional valuation theories

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