for the earnings lead indicator, I agree this plays out for S&P 500 ex secular growth tech, but do you think the inputs capture that increasingly important cohort of stocks? Only other observation, real rates are still -70bps on 10yr yield, yet growth software has derated from 25x to ~15-16x implying real rates closer to zero. Do you think there is a recovery trade worth expressing in profitable secular growth?
good question lou, thanks. the secular growth/mega profitable tech groups will experience a slowdown as well, but as you suggest it has tended to have a lower beta vs. cyclicals with more operating leverage.
as an example, FAAMG saw y/y LTM earnings growth fall from +29% (Nov-18) to +2% (Dec-19) last cycle, which obviously contributed to deceleration at the index level. for context, SPX ex FAAMG went from +21% to +1% over same period. i'm excluding the 2020 covid period for obvious reasons.
i would assume something similar this time as well, though could be a bit more painful in absolute terms given how significant profits were in the last year...risk of pull forward and subsequent payback, but as the group captures a bigger share of economic activity it is also more exposed to the economy. all that said, it would likely hold up better on a relative basis with more flexibility and levers to pull.
i do expect the profitable parts of secular growth to heal and recover from here. IMO the recent volatility is reflective of late stage, corrective portfolio deleveraging. i want my longs in high quality, low beta market segments this year with less market risk exposure overall and more dry powder.
Ok, this is going to sound peak lazy. HQGC, no one stop shop etf or index to play this strategy? Or are we going to have to crunch some numbers? Great read as always.
its a great question and i really wish i could get fully behind an ETF that fully captures what i think. i've found a few that come close, but have imperfections. QUAL, SPHQ, ILCG are respectable starting points. if you have access to equity swaps at institutions (GS, MS, JPM, etc) there are some additional options.
i prefer to create my own basket, which allows me to flex sector exposures through the cycle. would also note the most important part of a good long quality strategy is the often the short side (i.e. negative convexity)
USMV = low risk or short beta or defensive style. certainly some high quality growth that also falls in this bucket, but somewhat different exposures in my mind
Learned so much, thank you for sharing!
Excellent analysis. Thank you for sharing!
Very clear and helpful post, focussed and practical. Thanks very much!
Very very very nice letter, congrats!
for the earnings lead indicator, I agree this plays out for S&P 500 ex secular growth tech, but do you think the inputs capture that increasingly important cohort of stocks? Only other observation, real rates are still -70bps on 10yr yield, yet growth software has derated from 25x to ~15-16x implying real rates closer to zero. Do you think there is a recovery trade worth expressing in profitable secular growth?
good question lou, thanks. the secular growth/mega profitable tech groups will experience a slowdown as well, but as you suggest it has tended to have a lower beta vs. cyclicals with more operating leverage.
as an example, FAAMG saw y/y LTM earnings growth fall from +29% (Nov-18) to +2% (Dec-19) last cycle, which obviously contributed to deceleration at the index level. for context, SPX ex FAAMG went from +21% to +1% over same period. i'm excluding the 2020 covid period for obvious reasons.
i would assume something similar this time as well, though could be a bit more painful in absolute terms given how significant profits were in the last year...risk of pull forward and subsequent payback, but as the group captures a bigger share of economic activity it is also more exposed to the economy. all that said, it would likely hold up better on a relative basis with more flexibility and levers to pull.
i do expect the profitable parts of secular growth to heal and recover from here. IMO the recent volatility is reflective of late stage, corrective portfolio deleveraging. i want my longs in high quality, low beta market segments this year with less market risk exposure overall and more dry powder.
Thanks! very helpful
Brilliant work! Thanks for sharing
thanks cliff, appreciate the feedback
Ok, this is going to sound peak lazy. HQGC, no one stop shop etf or index to play this strategy? Or are we going to have to crunch some numbers? Great read as always.
its a great question and i really wish i could get fully behind an ETF that fully captures what i think. i've found a few that come close, but have imperfections. QUAL, SPHQ, ILCG are respectable starting points. if you have access to equity swaps at institutions (GS, MS, JPM, etc) there are some additional options.
i prefer to create my own basket, which allows me to flex sector exposures through the cycle. would also note the most important part of a good long quality strategy is the often the short side (i.e. negative convexity)
What about USMV? Great post :)
USMV = low risk or short beta or defensive style. certainly some high quality growth that also falls in this bucket, but somewhat different exposures in my mind