Coming Down the Home Stretch

by Justin Lowry, President & CIO, Global Beta Advisors, LLC

As we head into the final quarter of what has been another interesting year, let’s look at where we are and how we got here. Believe it or not, the S&P 500 Index was nearly flat during the third quarter. However, with all of the peaks and valleys throughout the quarter, it certainly didn’t feel like the S&P 500 ended flat.

Home Stretch

S&P 500 Prices (Jun 21 – Sep 21)

Source: Data from FactSet Research Systems

As you can see from the chart above, the S&P 500 peaked around 4,550 and dipped as low as 4,250, representing a nearly 7% range. That’s quite a range only to end the quarter nearly flat. You’ll notice the green bars represent the trading volume in the S&P 500. A technical analyst would point out that two of the largest volume days resulted in negative performance for the S&P 500, which is a bearish signal for the market. This is not surprising to us when the S&P 500 is sitting at record valuations.

Historical Monthly P/S of the S&P 500 Index

Source: Factset Research Systems, January 1985 through July 2021

As of 7/31/21, the S&P 500 had climbed to its highest ever price-to-sales multiple, trumping levels seen during the tech bubble of the late 1990s and early 2000s. We believe the only thing keeping the market from realizing a sell off to the degree of the tech bubble is the continued monetary support from the Federal Reserve. Throughout the year, we have seen the market reactive sharply negative when the Federal Reserve would signal hawkish views about monetary policy.

Historically, the fourth quarter of the year has yielded the best returns in the S&P 500.

S&P 500 Performance by Quarter

S&p 500 Performance by Quarter

Data from Factset Research Systems, measuring the average quarterly returns of the S&P 500 from January 1985 through September 2021.

That said, the current market and macro-economic environment are far from normal. We do believe that there will be somewhat of a “Santa Clause Rally” that puts the S&P 500 in store for a strong finish to 2021. However, even if the index does have a strong close to the year, the valuation risk in the market cannot be ignored.

Number of S&P 500 Companies Above/Below 3-Year PS Average

number of S&P companies above 3 Year Price to Sales Average

Data from FactSet Research Systems as of 09/30/21. PS means price-to-sales ratio. Price-to-sale ratio measures the ratio between a company’s market capitalization and its 12-month trailing revenue. 3-year price-to-sales average measured between 09/30/18 to 09/30/21.

As you can see, there are very few places to hide. The risk is even greater in higher growth-oriented strategies that disregard valuations as a fundamental investment practice and market cap weighted indexes such as the S&P 500 Index by virtue of their selection processes and weighting schemes, respectively.

This is not to say that the S&P 500 Index can’t continue to grind higher, especially if revenue and earnings growth exceed expectations in 2022 as companies grow into their valuations. Thus far, there have been mixed signals from what we can tell as to the impact that the COVID-19 delta variant wave has had and will continue to have on economic growth. Of course, that will impact the magnitude and duration that inflation may be observed in the economy. Consequently, that would then influence how the Federal Reserve will change or maintain their current accommodative monetary policy. Ultimately, we believe it’s important not to buy tomorrow’s growth at tomorrow’s price. We believe it’s important for investors to maintain balance in their portfolio and have cash on the sideline to jump on opportunities that the market may present. We believe it’s not a matter of if, but when, the market sees a more prolonged and sustained correction.

S&P 500 Index – a composition of the 500 leading companies, as determined by Standard and Poor’s, that covers approximately 80% of available market capitalization.

Price to Sale Ratio – a ratio between a company’s market capitalization and its 12-month trailing sales.

Past Performance is no guarantee of future results.

Investing involves risk including the possible loss of principal.  The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios, securities, sectors or any indexes mentioned herein.

The S&P 500® Index is composed of 500 selected common stocks most of which are listed on the New York Stock Exchange. It is not possible to invest directly in an Index.

Before investing you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus or summary prospectus. A copy may be obtained by visiting or calling (833) 933-2083. Please read the prospectus or summary prospectus carefully before investing.

Distributor: Compass Distributor, LLC

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