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Earnings season is just getting underway, and S&P 500 profits are expected to plunge nearly 9% year-over-year. But it’s not all gloomy, and there are many other ways to slice and dice the data to see what’s working for investors right now in the stock market.
For instance:
Aside from sector trends, you should also keep close tabs on which investment styles are performing best.
Investors employ many different styles: Large-cap vs. small, growth vs. value stocks, etc. And these styles are constantly shifting in and out of favor.
But one style shift that caught my eye during the first quarter was the outperformance of high-quality stocks over lower-quality, riskier shares – and it is worth paying close attention to.
High-quality stocks, those rated B+ or better by Standard & Poor’s, outperformed low-quality stocks (those rated C & D) by a very wide margin of nearly 10% during the first quarter, as you can see in the graph below.
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| Quality has its privilege. |
In fact, according to Merrill Lynch data, A+ rated stocks held up best during the volatile first three months of 2016, up about 9% as a group. Meanwhile, riskier stocks with hold or sell ratings declined more than 4%.
That’s a huge performance differential, and it speaks volumes about where we are in the market cycle!
We’re seeing the same trend at work in our award-winning Weiss Stock Ratings data, too. Fewer and fewer stocks earn our coveted A+ rating, and many of these top-rated stocks are posting stellar performance results compared to the lackluster overall market.
That’s because high-quality stocks tend to post consistently good results. Many pay dividends and grow their payouts steadily. Most have low debt and post higher returns on investment.
These are the kind of stocks that Warren Buffett likes to own for the long run, because they let you sleep well at night, but they’re not always in favor on Wall Street.
In fact, during the early stages of a new bull market, quality often underperforms as investors flock to riskier stocks they believe could have great rebound potential.
| “These are the kind of stocks that Warren Buffett likes to own for the long run.” |
As a bull market matures, momentum takes over and stocks that have performed well tend to keep outperforming, even as their valuations get expensive.
Just think of the recent mania over the FANG stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG).
When a bull market gets long in the tooth, as this one has, momentum tends to stumble – usually due to sky-high valuations.
And sure enough FANG, and other momentum stocks took a bite out of investors recently. NFLX and AMZN plunged 40% and 30%, respectively, between December and early February. Both rebounded more recently, but neither is close to their old highs.
And that’s when high-quality stocks really shine, during the later stages of a bull market.
Bottom line: Credit conditions are tightening and the Fed is also hiking interest rates. We’ve already witnessed several sharp swings in the stock market over the past year as a result. And elevated volatility appears here to stay.
We’re also in the third-longest bull market in history, and with a climate of slowing global growth, investors will grow more cautious and demand less volatile, higher-quality stocks.
Our Weiss Stock Ratings Heat Maps is one way to zero in on the best-quality stocks in the market right now. And it’s also a great tool to help you avoid the riskiest low-quality stocks. Simply screen for buy-rated stocks with a letter grade of B or better, and preferably and A-rating!
And be sure to send me your feedback: Do you think high-quality stocks are the best way to go in today’s volatile markets? Or are you finding better opportunities elsewhere? Let me know what you think by adding your comments below.
Good investing,
Mike Burnick
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Mortgage rates fell again this week, giving a boost to potential homebuyers. According to the latest data from Freddie Mac, the 30-year fixed-rate average edged down to 3.58% from 3.59% the previous week, its lowest level since May 2013. The rate was 3.67% a year ago. The 30-year fixed-rate has declined 43 basis points since the start of the year. “The persistent weakness in the global economy has been a boon to mortgage shoppers,” Greg McBride, chief financial analyst at Bankrate.com, told Bloomberg news. “It brought rates lower in a year we widely expected them to go higher.”
In more real estate news, foreclosure filings declined to the lowest level in more than nine years during the first quarter of the year, data firm RealtyTrac reported. Foreclosure activity was below pre-recession levels in more than a third of major metropolitan areas, another sign of progress in the recovery of the housing market. There were just more than 289,000 foreclosure filings in the first three months of the year, down 4% from the previous quarter and 8% lower than the same period a year ago – the lowest level since the final quarter of 2006.
Wages are picking up in almost all of the country as the labor market strengthens, statistics from the Federal Reserve showed. The Fed said that 11 of its 12 regions reported wage growth between late February and early April. The strongest wage pressures were in areas with labor shortages, such as skilled manufacturing, construction and information technology. Job growth has averaged a strong 225,000 a month since the beginning of 2015, but wages had been slower to rise.
A powerful earthquake with an estimated 6.4 magnitude hit southern Japan on Thursday night, knocking down walls and a number of houses. There are no immediate reports of casualties. A government Cabinet official said that damage was being assessed. A number of houses have collapsed but, the official added that there were no issues reported at nearby nuclear facilities. Reports said the epicenter was near the town of Mashiki, near the larger city of Kumamoto.
The Money and Markets team
P.S. Did you miss the Gala World Premiere of “THE UNSEEN HAND”? Tune in to watch Mike Larson reveal what really moves stocks and name the types of investments destined to soar for the rest of 2016!Â
Don’t miss out — click this link to view “THE UNSEEN HAND” now.
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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Makes me wonder why I have ever owned anything but A rated stocks, that pay dividends, and grow their dividends. Jim
Interesting points – thanks! I’d be interested to see how the equity performance by S&P rating does over longer periods of time and rising and falling markets, including the last 2 busts. Or is does lower risk lead to lower returns over the long term as the outperformance occur during flights to safety?
would like to find out more about etf buying it with options.
I need help from wiser minds out there.
The other day oil went up in price and the market went up
Last night or the night before oil fell yes the market again went up yet again on this news.
Morgan Stanley one of the few banks/companies that showed some feeble strength yep the market went up again.
The yen keeps increasing in value which makes their exports more expensive and yep the market Nikkei jumps by almost a 1000 points in 2 days. I will not even touch on all the other problems existing there.
That black hole which is China shows numbers on 3 or 4 different economic levels and yep the figures (fudged?) are all slightly above estimates talk about miracles. The Chinese market of course jumps.
Gold which I like has made a really good run and bang the rug is pulled out from underneath it. Why? Well it seems the Fed has trotted out their beige book that has the same old the porridge is not to hot and not to cold old information and yep the markets go wild. Silver is fighting and uphill battle.
In Japan it takes an earthquake to knock down the Nikkei ever so slightly today.
I read a lot of economists reports and a quite a few say that that the black hole which is China is only growing around 4% Personally I would sooner believe these figures than the figures released by a closed and closely monitored society. What ever happened to markets climbing on earnings, job creation and real growth not this numbers game we now see. Does every working person see his only hope at retirement being the stock market as its the only game in town thanks to the Fed, Central Banks, Wall Street and of course Governments. The game is rigged plain and simple.
It appears to me that Investors have to adopt a “go with the flow†attitude. Fundamentals , debt, politics, central bank policy, are all considerations of a logical person. The Market is NOT logical. Current investors are buying on dips and selling in rallies and it’s working for now. Foreign money is still flowing in and Big Money Funds, want to trade and profit, so the Market is ebbing and flowing almost day to day. I feel that between now and Mid May the fluctuations will continue so profits will be made day to day and week to week. After that there may be a period of settling to lows until after Summer when activity will fluctuate again gravitating upward then settling around year end. This is my theory based on a few factors. I have been right most of the year I got out in November and recently came back in. There is no crystal ball you have to go with your gut and hope/pray for the best.
I appreciate all your articles . There is a lot of bearishness oozing in your mind about the markets, which at this moment are too high to buy and too firm to sell.
I have been a bear for far too long but without desirable results. since no leverage is involved in my investments, I am hoping and praying that all your forecasts and forebodings come true. Good luck!. god bless your team!.
How about junior lithium stocks . Some of them look set to fly if they have not already
excellent article, mike. you need to repeat this message over and over and over again. buy a low cost s&p fund and you’ll always own the top 500 stocks on the market. the day one become bad is falls off and the next best stock takes it’s place. you always own the best stocks. this is the only type of investing i do.