Market Separation – Consolidation or Correction?

Headline news can be misleading. During much of 2017, we have seen and heard incessant headlines about the market reaching new all-time highs. It sounds bullish. As a stock investor, you may look at the results in your own portfolio and wonder what market is being referred to by the headline news.

Large capitalization stocks measured by the S&P 500 (ticker symbol: IVV) are up roughly 10% year-to-date (YTD) versus small capitalization stocks which are up only about 1.5% as measured by the Russell 2000 (IWM).

Value stocks (IVE) are underperforming growth stocks (IVW). The chart below shows the S&P 500 value stocks are underperforming the S&P 500 growth stocks year-to-date by roughly -12%.

Perhaps the most striking comparison of the year is the NASDAQ 100 (QQQ) up roughly 21% versus small cap value (IVN) which is down on the year by about -4%.

Is the market bullish or bearish? It all depends on which market you are talking about.

Here is what we know about the markets.

  1. Many significant parts of the market have shown little appreciation year-to-date
  2. Broadly, earnings and revenues have been rising and exceeding estimates
  3. There are no current signs of a recession
  4. International economies are expanding at an accelerating rate

Many parts of the market are less expensive relative to their earnings than they were at the start of the year. As we approach the end of 2017, investors will increasingly shift their price/earnings valuations to account for 2018 earnings which are estimated by FactSet to be up about 11% year-over-year.

A loss of momentum in many sectors of the overall stock market can be a bearish signal. In this case, we are seeing a loss of stock price momentum without seeing a loss in fundamental economic momentum. Bull markets are characterized by times of appreciation followed by times of price consolidation. This week, it appears many parts of the market are in a time of consolidation rather than correction.

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US Capital Partners

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.


Jeffrey Sweeney