Merry Christmas and happy holidays from our team at Canterbury Investment Management.  This year has certainly been unique, filled with a high degree of uncertainty, but I hope everyone is able to take time to reflect and celebrate what is important to you.

While we do not subscribe to the idea of “seasonality,” the market appears to be showing strength towards retail stocks.  The idea that the holiday season is the strongest for retail stores is being reflected in the markets.  As it stands today, the retail segment of the market (which would be part of consumer discretionary) is the highest ranked segment in the market.  Most notably, companies like Chewy (pet food), Stitch Fix (personalized styling), GameStop (video games), and Etsy (handmade items) have made strong contributions to the sector.  Even more notable, out of those stocks, only Etsy is an S&P 500 company.

In fact, there are 86 stocks in the State Street Retail ETF (Ticker: XRT).  Of those, only 25 are S&P 500 companies, and the rest are either small-cap, mid-cap, or micro-cap stocks.  Of the top 20 performers in retail, only 3 stocks are in the S&P 500.

So, what does this mean?  Well, the strong performance of the smaller retail stocks reflects the strength we are currently seeing in small-caps and mid-caps relative to large cap (S&P 500) stocks.

We wrote about the strength of small cap stocks in our last update two weeks ago.  Since then, the strength of small and mid-cap stocks has increased.  This does not mean that large-caps are performing poorly, but rather are just lagging those other styles.  Currently small-cap growth and mid-cap growth are the two best performing styles on a risk adjusted basis.  This is followed by small-cap value and mid-cap value.  Large-cap growth and value hold the last 2 spots.  We have also mentioned the strength of international equities, most notably in the Asia-Pacific region and other emerging markets.

StyleRisk-Adjusted Rank
Small Cap Growth1
Mid Cap Growth2
Emerging Markets3
Small Cap Value4
Mid Cap Value5
International Developed Regions6
Large Cap Growth7
Large Cap Value8

Source: CIM

Bottom Line

The big question is “what does this mean for portfolio management?”  The Canterbury Portfolio Thermostat is an Adaptive Portfolio Strategy.  It has a process in place to identify potential areas of the market that have low risk qualities.

Rotation is a law of the markets.  Anything driven by supply & demand will have periods of being in favor and out of favor.  An adaptive process can identify the characteristics of something trading efficiently versus something trading inefficiently and adjust its allocations.  For example, technology was highly ranked in terms of the US sectors for most of this year.  In recent months, it has fallen in terms of risk-adjusted relative strength, while the financial sector has risen in risk-adjusted relative strength. An adaptive process can lower its exposure to Technology and increase its exposure to small cap stocks, emerging markets, or a sector like Financials.

The idea is that as markets move and environments change, portfolios have to adapt and maintain stability within the portfolio, but also hold securities that are in favor, which means that today they have the low-risk characteristics of a bullish security.  We do not know how long those characteristics will stay in place, but an adaptive portfolio continues to monitor its positions and make adjustments.