2-Quarters-in-1

Categories Author: Scott Bartone, Investing, U.S.

“Frankly, [4Q16] was almost a story of two quarters in one,” explained TD Ameritrade CEO Tim Hockey a couple days before the inauguration.1 “November 8th was the election; we saw retail investors essentially go on the sidelines up until that date, trading levels were down, and then it just exploded right after that. And, it’s actually carried over into January as well — trading levels are high.”

Indeed, the 2016 Presidential Election saw a surge in equity market returns (and market activity in general, which is where Hockey’s observations come into play2). On the flip side, there was also a reversal for many investment factors and sectors. Valuation metrics and Shareholder Yield had already started to come into favor by 3Q16, but they accelerated in the market for the months following the election. Conversely, the poor returns of strong Momentum3 and Earnings Growth4 accelerated their slide. Value outperformed growth based on Russell’s definitions as well, with the Russell 1000® Value outperforming the Russell 1000® Growth by about 5% after the election.

Factor & Sector Returns and the Election

For much of the past 5 years, the Fed’s monetary policy has been to maintain low rates as a catalyst to spur growth. Now, the market is pricing in that fiscal policy, to reflect President Trump’s cabinet, and a Republican-led Congress may help push growth as the Fed begins to raise rates.
For the factor investor, here’s how 2016 looks in hindsight (for definitions of our multi-factor composites in the chart below, see our “Factor Attribution Tool” overview):

2016 Pre- and Post-Election — U.S. Large Stocks
Factors & Themes
chart

Sectors saw a similar transformation as well. Banks within the Financials sector have been surging since the election due to the prospects of reduced regulation and a rising rate environment, which should help profits from loan activity. Whereas the Utilities and Consumer Staples sectors, which tend to attract more income oriented-investors, have struggled since rising rates have increased bond yields.

2016 Pre- and Post-Election — U.S. Large Stocks
Sectors
chart

The story of value outperforming growth played out in Russell’s style indexes as well (see also “A Peculiar 2Q16”), with the R1000 Value outperforming R1000 Growth by 10% in 2016 — the highest return spread favoring Value in 10 years!

Russell 1000® Value Excess vs. Russell 1000® Growth
chart

What lies ahead for factor investors?
Disciplined investing with no regard to Tweets, headlines (with the latter two fast becoming one and the same), or any other noise that current events play out. Those who can stay their course could see great rewards for their patience.



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  1. From a Jan. 18, 2017 CNBC “Closing Bell” interview, repositioned a day later as “Trump Tweets Boost TD Trading Revenue: CEO” (in Ignites’ “This Week’s Crucial Clips” email blast).
  2. Surname pun somewhat unintended — sorry!
  3. Whereas common frameworks typically measure momentum using raw 6-month or 12-month momentum, OSAM’s multi-factor Momentum “composite” uses multiple measures of momentum and penalizes highly-volatile stocks.
  4. OSAM’s multi-factor Earnings Growth “composite” consists of multiple underlying constituents, which measure the consistency of earnings and profitability.