Earnings season is just getting underway, and S&P 500 profits are expected to plunge nearly 9% year-over-year. But it’s not all gloomy, and there are many other ways to slice and dice the data to see what’s working for investors right now in the stock market.
Aside from sector trends, you should also keep close tabs on which investment styles are performing best.
Investors employ many different styles: Large-cap vs. small, growth vs. value stocks, etc. And these styles are constantly shifting in and out of favor.
But one style shift that caught my eye during the first quarter was the outperformance of high-quality stocks over lower-quality, riskier shares – and it is worth paying close attention to.
High-quality stocks, those rated B+ or better by Standard & Poor’s, outperformed low-quality stocks (those rated C & D) by a very wide margin of nearly 10% during the first quarter, as you can see in the graph below.
|Quality has its privilege.|
In fact, according to Merrill Lynch data, A+ rated stocks held up best during the volatile first three months of 2016, up about 9% as a group. Meanwhile, riskier stocks with hold or sell ratings declined more than 4%.
That’s a huge performance differential, and it speaks volumes about where we are in the market cycle!
We’re seeing the same trend at work in our award-winning Weiss Stock Ratings data, too. Fewer and fewer stocks earn our coveted A+ rating, and many of these top-rated stocks are posting stellar performance results compared to the lackluster overall market.
That’s because high-quality stocks tend to post consistently good results. Many pay dividends and grow their payouts steadily. Most have low debt and post higher returns on investment.
These are the kind of stocks that Warren Buffett likes to own for the long run, because they let you sleep well at night, but they’re not always in favor on Wall Street.
In fact, during the early stages of a new bull market, quality often underperforms as investors flock to riskier stocks they believe could have great rebound potential.
|“These are the kind of stocks that Warren Buffett likes to own for the long run.”|
As a bull market matures, momentum takes over and stocks that have performed well tend to keep outperforming, even as their valuations get expensive.
Just think of the recent mania over the FANG stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG).
When a bull market gets long in the tooth, as this one has, momentum tends to stumble – usually due to sky-high valuations.
And sure enough FANG, and other momentum stocks took a bite out of investors recently. NFLX and AMZN plunged 40% and 30%, respectively, between December and early February. Both rebounded more recently, but neither is close to their old highs.
And that’s when high-quality stocks really shine, during the later stages of a bull market.
Bottom line: Credit conditions are tightening and the Fed is also hiking interest rates. We’ve already witnessed several sharp swings in the stock market over the past year as a result. And elevated volatility appears here to stay.
We’re also in the third-longest bull market in history, and with a climate of slowing global growth, investors will grow more cautious and demand less volatile, higher-quality stocks.
Our Weiss Stock Ratings Heat Maps is one way to zero in on the best-quality stocks in the market right now. And it’s also a great tool to help you avoid the riskiest low-quality stocks. Simply screen for buy-rated stocks with a letter grade of B or better, and preferably and A-rating!
And be sure to send me your feedback: Do you think high-quality stocks are the best way to go in today’s volatile markets? Or are you finding better opportunities elsewhere? Let me know what you think by adding your comments below.
Mortgage rates fell again this week, giving a boost to potential homebuyers. According to the latest data from Freddie Mac, the 30-year fixed-rate average edged down to 3.58% from 3.59% the previous week, its lowest level since May 2013. The rate was 3.67% a year ago. The 30-year fixed-rate has declined 43 basis points since the start of the year. “The persistent weakness in the global economy has been a boon to mortgage shoppers,” Greg McBride, chief financial analyst at Bankrate.com, told Bloomberg news. “It brought rates lower in a year we widely expected them to go higher.”
In more real estate news, foreclosure filings declined to the lowest level in more than nine years during the first quarter of the year, data firm RealtyTrac reported. Foreclosure activity was below pre-recession levels in more than a third of major metropolitan areas, another sign of progress in the recovery of the housing market. There were just more than 289,000 foreclosure filings in the first three months of the year, down 4% from the previous quarter and 8% lower than the same period a year ago – the lowest level since the final quarter of 2006.
Wages are picking up in almost all of the country as the labor market strengthens, statistics from the Federal Reserve showed. The Fed said that 11 of its 12 regions reported wage growth between late February and early April. The strongest wage pressures were in areas with labor shortages, such as skilled manufacturing, construction and information technology. Job growth has averaged a strong 225,000 a month since the beginning of 2015, but wages had been slower to rise.
A powerful earthquake with an estimated 6.4 magnitude hit southern Japan on Thursday night, knocking down walls and a number of houses. There are no immediate reports of casualties. A government Cabinet official said that damage was being assessed. A number of houses have collapsed but, the official added that there were no issues reported at nearby nuclear facilities. Reports said the epicenter was near the town of Mashiki, near the larger city of Kumamoto.
The Money and Markets team
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