This article was written by Invesco PowerShares Senior Equity Product Strategist Nick Kalivas.
With the first half of the year behind us, it’s time to take a look back at investment performance during the first six months of 2015. So far, momentum and growth have been the best-performing investment style factors, while active, large-cap, low volatility, value and dividend strategies have lagged. Eight factors were able to beat the S&P 500 Index, and three factors outperformed the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indices. Small- and mid-cap stocks outpaced large-cap shares, aided by a strong dollar and reversions back to the mean in performance from 2014.
First half 2015 returns by investment factor
Source: Bloomberg LP, June 30, 2015. Past performance is not a guarantee of future results. An investment cannot be made directly in an index.
The first half: A bifurcated earnings backdrop creates performance dispersion
Momentum stocks tend to perform well during what quantitative analysts refer to as “periods of dispersion.” These are periods when the market can clearly focus on stocks with strong and weak performance, and discriminate between winners and losers. Dispersion contrasts with periods where stocks are moving up and down together in high correlation. This type of environment is sometimes referred to as “risk-on/risk-off.” The lagged impact of a rally in the US dollar, a sharp drop in energy prices and a mixed trend in sector earnings have contributed to the dispersion we’ve witnessed. One indication of dispersion rests in declining correlation between stocks and the overall market. The 63-day correlation of S&P 500 stocks to the S&P 500 Index eased through the first half of 2015, falling from 0.6174 on Dec. 31, 2014, to 0.5445 as of June 30, 2015.1
The dispersion in earnings was exacerbated by a mixed corporate earnings outlook. For example, the strong dollar has weighed on earnings in the export-heavy materials, energy, and consumer staples sectors – with shares in the energy and materials sectors further hampered by weak commodity prices. At the same time, consumers are benefiting from cheaper import prices and lower energy costs brought about by a strong dollar. These trends cut both ways for industrial companies, which typically benefit from lower energy prices, but see their exports hurt by the strong US dollar. The following table illustrates this dispersion in the earnings outlook:
S&P 500 earnings by sector
Source: Bloomberg LP, June 30, 2015. Q2 2015, 2015, and 2016 figures based on estimates.