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mYCharts - June 23, 2020

S&P 500 Storylines with Lyn Alden


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Q: Give us an overview of your firm, Lyn Alden Investment Strategy. What is your background and how do you aim to educate investors?

A: I operate Lyn Alden Investment Strategy at LynAlden.com. We provide investment research for retail and institutional clients, and our strategy focuses on value investing with a global macro overlay. We focus on broad asset allocation, as well as individual stocks, for long-term low-turnover investing as well as some counter-cyclical tactical moves.  

My background is a blend of engineering and finance, with a bachelor’s and master’s degree in engineering, so I tend to take a rather quantitative approach to finance and investing. My approach for investor education is to take complex macroeconomic topics and translate them into plain English while identifying financial bottlenecks to profit from, and expressing these views with asset allocation approaches and stock ideas.

Q: The chart above shows the ratio of an equal weight S&P 500 to the more popular market cap-weighted version. What is the primary takeaway from your analysis?

A: Over the long run (back to 1990 with this data set), equal weight large cap indices tend to outperform market-weight versions. The equal weight outperformance tends to occur in the first half of a business cycle when leadership rotation changes (existing mega caps underperform, while newcomers move up). The equal weight underperformance tends to occur at the later stage of a business cycle when momentum tends to push up existing market leaders to high levels of valuation. 

This ratio divides the equal weight index by the market weight index, and the market weight index is very concentrated in mega-cap names. The ratio tends to spike downward during recessions (equal weight sharply underperforming) and rebound sharply out of recessions, and that is what makes it compelling in this environment. I continue to monitor this ratio for a potential breakout, to see if equal weight begins sustainably outperforming, which would be a healthy sign for the market and a potential source of alpha generation via the equal weight S&P 500 ETF (RSP).

Q: Take us to the next step in this analysis. Your chart indicates that we entered a recessionary period. What does that mean for mega caps as well as relatively smaller companies going forward?  

A: An official recession was declared in February 2020. During the market sell-off, mega caps outperformed the broader index, so the S&P 500 became more concentrated and the market weight index outperformed the equal weight index. 

Since the market bottom, this has formed a consolidation pattern, with attempted breakouts. If this turns into a sustained reflationary recovery, the equal weight version could very well begin a cycle of outperformance, which would mean more market breadth and a decreased percentage of the S&P 500 dedicated to the top 5 or 10 mega cap companies.

Q: You’ve been using YCharts for a long time. How does the platform help you in your investment analysis, as well as your Seeking Alpha blogs and research on your website?  

A: YCharts is an extremely valuable tool for charting individual stock fundamentals, including revenue, earnings, debt levels, and valuations. Many investors focus too heavily on stock price, but YCharts presents a very easy way to chart the underlying fundamentals of the company over time. 

More recently, I’ve been heavily using it for ratios (such as the equal weight vs market weight S&P 500 indices) and for broad economic data.

Q: What do you think is the most overlooked storyline in the markets right now? Why should investors be paying attention?

A: The Federal Reserve began discussing yield curve control in 2019, then the 2020 pandemic shutdown and subsequent recession led them to begin discussing it again. Yield curve control is when the Federal Reserve creates dollars to buy Treasuries as needed to lock Treasury yields at or below a target rate. It was performed in the 1940s in the United States (the only other time that federal debt as a percentage of GDP reached over 100%) and is currently performed in Japan. 

What this effectively means, once they formally implement it, is that Treasury yields will likely be locked below the inflation rate. This tends to be bad for Treasury performance in real terms, but very good for precious metals and commodity producers thanks to negative real yields. 

The market is still working its way out from a big deflationary shock so inflation is not really on most investor’s horizons, but as we move deeper into the 2020s, this is a key long-term trend to be aware of, in my opinion. It could very well result in currency devaluation, global equity outperformance, and good gains for precious metals and commodity producers. 

Lyn Alden

Lyn Alden Investment Strategy

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