Published On: November 10th, 2021|By |Categories: Market Updates, Value|2.9 min read|

Despite persistent headline stagflation concerns and supply chain issues, the market appears to be on very solid footing heading into the final stretch of 2021. The cumulative Advance/Decline line for all NYSE securities (chart below) broke out to a new high last week after a few months of being trapped in a tight trading range. This chart signals broad based stock gains – the average stock is starting to perform strongly again. Important to note is that it is usual for this chart to top out and roll over before the actual market index does. As such this chart signals further positive returns ahead.

Cumulative Advance/Decline Line For NYSE Securities

Source: Strategas Research Partners

Market leadership has decidedly turned pro-cyclical. The market continues to suggest economic growth is reaccelerating from the soft patch in Q3, or at the very least, the supply chain and other issues are sufficiently known and discounted at this point. We have observed strong absolute and relative performance in the economically sensitive areas of Transports, Autos, Financials, and Consumer Discretionary. Even within the Technology sector semiconductors have now broken out to new relative highs versus software (more defensive). Last week also witnessed an absolute breakout of U.S. smaller companies (chart below) which have been stuck in a range since the beginning of the year. Similar cyclical leadership trends are starting to re-emerge in Europe as well and should strengthen into year-end.

Rusell 2000 Relative to S&P 500

Source: Strategas Research Partners

Of further interest, and consistent with this pro-cyclical theme, is the recent strength in U.S. Retail REITs – mainly composed of shopping centres – which were left for dead following the pandemic and resulting surge in internet retail market share. There is clear evidence that as shopping centres reopen, footfall is returning to pre-pandemic levels and shopping basket sizes have actually increased. This sector continues to sell at depressed valuations, especially in Europe. We do expect the European Retail REITS to follow this U.S. trend which will significantly benefit our portfolio returns given our exposure to this segment.

Bloomberg Retail REIT Index | Daily % Change

Source: Strategas Research Partners

Despite a bumpy path during the year, the physical reopening theme remains intact. This is in stark contrast to the ‘from home’ theme that dominated 2020 and led to astronomical valuations being place on many unproven businesses. The list below is just a reminder of the dangers inherent in blindly following a trend without doing the necessary fundamental due diligence on companies and understating the embedded expectations in their valuation. These thematic favourites remain significantly below their 2020 highs.

Thematic favourites from home

Source: Strategas Research Partners

Many investors seem reluctant to take advantage of these clear positive market signals given the already strong returns experienced year-to-date. We have pointed out in previous writings of the strong seasonal tailwinds that have now started, and which have historically proved more beneficial when accompanying an already strongly upwardly trending market. The table below is another take on this reality and again points to the potential for a strong finish to the year based on historical patterns.

Performance since peak in 10-year yields on 3/31/21 | Mpartners Vermogensbeheer

Source: Strategas Research Partners

Looking beyond this year and into 2022, there is a clear cyclical skew among the sectors expected to post the strongest 2022 EPS growth. Expected to benefit from easing supply chain issues and the ongoing reopening of the global economy, Industrials, Energy, and Consumer Discretionary lead by notable margins. We continue to find many attractively valued names within these sectors. The only earnings blemish on the chart below is in the expected negative growth for Financials. It should be noted that this decline is mainly owing to specials factors – the historic strong growth in Investment Banking activities of the last 2 years, and the unexpected strong economic recovery of 2021 has led to banks having to adjust the overly pessimistic credit write-offs of last year which never materialized. Core earnings of Bank remains strong going in to 2022 – especially within Europe.


2022 S&P 500 EPS Growth Rates by Sector

Source: Strategas Research Partners

David Williams (1970) is verantwoordelijk voor het beleggingsbeleid van Mpartners. Na een korte carrière bij het Ministerie van Buitenlandse zaken van Barbados begon David in 1997 bij Insinger de Beaufort Asset Management en in 2002 werd hij director. Hier droeg hij verantwoordelijkheid voor het investment team en de beleggingsfondsen (zowel long-only als gehedgde portefeuilles). Zijn specialisatie is Europese aandelen. In 2010 heeft hij samen met de andere partners Mpartners opgericht. David Williams heeft een B.A (Honors) van de University of Kent, een M.Sc. in Internationale Politieke Economie van de London School of Economics en een MBA van Nijenrode.