Combining value, momentum factors can help avoid hidden dangers of inexpensive stocks
The idea of purchasing stocks that are inexpensive relative to their peers, or to their intrinsic value, can make value investing an attractive investment strategy. After all, value has a well-earned reputation for being a rewarded factor, with famous investors like Benjamin Graham and Warren Buffet known for their value-based investment approaches. Value is also grounded in academic research. The groundbreaking Fama-French Three Factor Model incorporates value, along with the size and market factors, to help portfolio managers improve the security evaluation process.
What is a value trap?Continue
Growth and momentum strategies make a comeback as other factors take a breather
The breadth of factor performance narrowed significantly in the first quarter of 2017. During this time, only four factor-based indices outperformed the broad-market S&P 500 Index, compared with 17 in the previous quarter. The large- and mid-cap growth and momentum factors were the clear winners during the first quarter, outperforming the S&P 500 Index by sizeable margins.
Headwinds following November’s elections
Many factors faced headwinds following a strong post-election equity rally, with market gains highly concentrated. In fact, nearly a quarter ofContinue
A potential increase in defense spending and an uptick in commercial aircraft orders could boost the industry’s prospects
The defense industry has been a strong performer since the Nov. 8 US elections. Between Nov. 8, 2016, and Feb. 24, 2017, the SPADE Defense Index has rallied 14.54% — outpacing the S&P 500 Index by more than 3%.1 Given the scale of the Trump administration’s proposed defense budget, as well as positive trends in commercial airline orders, I believe prospects are favorable for aerospace and defense firms.
US aerospace and defense orders are rising
After showing flat to declining growth since 2010, US defense orders — which include aircraft, related parts and other military hardware produced by the Department of Defense — have been trending upward and are now approachingContinue
Improved corporate profits, new activity could be key to future performance
Infrastructure spending has been a hot topic since the November elections. Building and construction stocks have been buoyed by the outlook for infrastructure spending — most Democrats in Congress and President Donald Trump agree that additional spending is needed to improve our infrastructure. The Dynamic Building & Construction Intellidex Index rallied 17.73% between Nov. 8, 2016, and Feb. 21, 2017 — well ahead of the S&P 500 Index, which rose 11.23% during this same period.1 A cyclical recovery in the economy is also creating tailwinds for leading indicators of construction activity.
Here are three reasons I believe building and construction stocks have moved higher:Continue
Pairing factors can help capitalize on market trends, while providing a potential hedge
Although investment factors have shown the ability to outperform market-cap-weighted benchmarks over time, factors are cyclical by nature — falling in and out of favor depending on market conditions. In my view, a particularly useful way to assess performance and grasp shorter-term cyclical factor movements is by considering excess returns on a 12-month rolling basis.
Excess return is defined as the difference in return between a factor index or exchange-traded fund (ETF) and a benchmark index, such as the S&P 500 Index. Assessing excess returns on a rolling basis captures performance in overlapping 12-month periods — allowing investors to gauge the consistency of returns over time.
With that in mind, let’s take a look at rolling 12-month excess returns for a small sample of investment factors versus the S&P 500 Index. The chart below begins in April 2012, based on the inception date for the longest-tenured of these factor indices.Continue