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It is not uncommon for different value metrics to produce different investment outcomes, so value indices and ETFs generally blend value metrics. The selected metrics and their weightings produce a particular impression of value investing performance. This selection feature differs from cap-weighted indices, where only one metric, cap weight, is considered. What has been happening in the consumer staples sector of the S&P500 has been extreme, highlighting what a value blend masks.

The sales/employee ratio should be a good measure of employee productivity. However, it varies considerably across market sectors, much higher in capital-intensive industries such as energy and utilities and much lower in more labor-intensive sectors such as industrials and consumer discretionary. The sales/employee ratio has been most effective as a source of investment return in consumer discretionary, a sector that includes retail, hospitality, autos, and entertainment, which rely on large numbers of employees.

In his March State of the Union address, President Biden proposed raising the excise tax on stock buybacks from 1% to 4% to discourage companies from engaging in stock repurchases. On April 12, the Department of Treasury and the IRS followed up with proposed regulations on stock buybacks. Kamala Harris endorses Biden’s plan to quadruple the tax. Is there evidence that the proposed tax has affected buyback-related stock performance? If there was a tax effect, would ongoing stock performance reflect the odds of this tax becoming enacted, reflecting the market’s view of whether Harris or Trump will be the next president?

Momentum was a driving force for the market in 2024 until momentum peaked on July 9. Momentum resumed its upward climb at the end of July, and the question now is whether momentum will continue to be a force, perhaps driving the market upward as it did before the summer. The problem with expecting sustained momentum strength is that reversal has consistently performed well since mid-June. Momentum means stocks are trending; reversal means stocks aren't trending. They shouldn't both continue to work well.

A distinction of tech companies is that they are sources of innovation and growth. In addition, large-cap tech companies often rank among the highest quality in the market when evaluated by typical measures such as Return on Equity (ROE). That is why the tech weight in the quality ETF QUAL has grown to 43%. Furthermore, ROE has been the most effective driver of long-short stock returns within the tech sector of the S&P500, more than momentum or size.

Two notable features of the 2024 market rally were the power of momentum and the dominance of large-cap stocks. The market peaked on July 16, but momentum and size peaked a week earlier, on July 9. The market now looks like it bottomed on August 5. That’s about a week after momentum and size bottomed on July 30.

The public was introduced to Open AI's ChatGPT on November 30, 2022. It took a month for the potential of this breakthrough to electrify the performance of tech stocks. The tech sector in the S&P500, measured by the XLK ETF, dropped in December. But XLK took off at the beginning of January and returned 55% in 2023.

The S&P500 has returned 15% through June 20, 2024. Half of the gains were achieved since early May. Momentum also has a strong 2024, but its excess return this year was achieved before early March. Since then, the power of momentum has spread throughout the market. The chart illustrates the momentum story.

It took eight weeks after the 9/11 attack on the US for the S&P500 to sustain its recovery to its pre-9/11 level. The rebound from its 9/21 low was substantial, returning 21% by mid-March. However, seven months after 9/11, the S&P500 dropped below the pre-9/11 level until the end of 2003. How does that compare to Israel's stock market experience since the October 7 attack?

In previous articles, I've highlighted the strong correlation between the direction of bond yields and the return to Free Cash Flow yield (FCF yield - Free Cash Flow per share divided by current share price). This correlation is because value stocks, with their shorter-duration cash flows, are more resilient to increasing rates than growth stocks with longer-duration cash flows. This post is an update about what stocks appear to be pricing for the direction of interest rates.

The markets are frustrated, waiting for a decline in interest rates. There is now the added concern of rates going higher. In a recent note, I showed that when credit risk is tight, as it is now, FCF yield (Free Cash Flow per share divided by current share price) moves in tandem with the direction of interest rates. The reason is that the cash flow duration is shorter for value companies than for growth companies. Hence, increasing rates benefit value, and declining rates hurt. The FCF yield factor for value stocks that I use is a long-short portfolio of stocks from the top 500 market cap US stocks, long the top FCF yield stocks, and short the lowest in each sector (i.e., sector neutral). It is produced and rebalanced weekly using Finsera platform.