![](/sites/default/files/styles/1086x410/public/WeeklyEquitiesComm_NEW_Photo%20%281%29.png?itok=4TYo6rpI)
Weekly Investment Commentary: Bullseye on a bear market rally
Bottom line up top
- Is being bullish back in season, or did market bears simply hibernate this summer? After starting the second half of the year in bear market territory, the S&P 500 rallied 17% this summer, providing a welcome reprieve to weary U.S. equity investors (Figure 1). However, with the rally now losing steam, investors have been left wondering if the continued direction is up or down. Considering weaker U.S. earnings growth (actually negative for the second quarter when excluding the energy sector), the increasing number of S&P 500 companies providing lower guidance (>50%) and a softening of manufacturing and service data we are in the camp that equities just experienced a textbook “bear market rally.”
- Does history suggest we hibernate during this bear market? We analyzed monthly returns for the S&P 500 going back to 1928 in order to obtain historical context (Figure 2). September, specifically, has been the worst month for U.S. equity market returns, even when adjusting for 9/11 and the GFC. The so-called September Effect is actually a global phenomenon. Some attribute the effect to an end of summer/back to work mentality, which ushers in higher trading volume and tax-loss harvesting. This technical data point, alongside an uncertain macro and fundamental backdrop, keeps us from chasing the recent rally and even using it as an opportunity to take profits.
"This technical data point, alongside an uncertain macro and fundamental backdrop, keeps us from chasing the recent rally."
Portfolio considerations:
Sometimes quality is the best defense. Within Bloomberg’s U.S. equity factor universe, the top three performing factors since the 16 June bear market low have been stocks with high expected volatility (implied by the options market), high beta and high trailing volatility. It’s notable that these also happen to be three of the worst performing factors year-to-date. This summer whipsaw in factor performance shows how painful it can be when investors get overly defensive at the wrong time, just to watch the recent underperformers recover the majority of their losses.
For that reason, we don’t think investors should hide out in defensive sectors that are trading at valuation premiums relative to the market. Instead, we recommend maintaining broad sector diversification with strategies that can identify higher quality names across sectors that have a track record of growing dividends. Infrastructure strategies that diversify across sectors, types of infrastructure and regions are also well positioned for what we believe will be a persistent inflation environment (even if June was not the year-over-year peak).
"We recommend maintaining broad sector diversification with strategies that can identify higher quality names."
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Nuveen provides investment advisory services through its investment specialists.