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Market Review April 3 2023
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April 2024

Market Review - April 3, 2023

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This week's discussion is an exciting one! We're diving headfirst into the market's rebound from the October 2022 lows. Will we witness the rise of another bull market or is this just an extended bear-market rally? We'll be exploring the phenomenal opportunity of value stocks. Finally, we'll take a panoramic view of the volatile world of cryptocurrency.

You can read last week's review here.

A new bull market in the making

Or is it? Let's dive into the data.

Despite facing steep interest rate increases in the past 12 months, the market has remained resilient. The Federal Reserve is anticipated to start cutting rates in the coming months, conditional on OPEC's oil-production cuts not leading to another inflationary surge. We have technically entered a bull market territory. The S&P 500's has risen 15.8% while the Nasdaq-100's has surged 22.7% from October 2022 bottom. We have graphed the performance of each index over the past year. Although the Nasdaq has shown an impressive return since October, it is still lagging behind the S&P 500's overall performance for the prior 12-months.

QQQ vs SPY

The Market's Recent Performance Misleading?

There is another side to this story. The market's recent positive performance has been predominantly driven by the tech giants. We've plotted the S&P 500's performance alongside the % of stocks within the index that have outperformed the index within the prior 3-months. At present, only 34% of the market has outpaced the benchmark. This indicates that a limited number of stocks have been responsible for the majority of the gains.

Number of stocks outperforming the market

Equal vs Market-Cap Weighted S&P 500

The S&P 500 is structured as a market cap weighted index, meaning that stocks with larger market capitalizations receive a higher allocation. In contrast, an equal-weighted index assigns an equal allocation to each stock. We have charted the performance of the S&P 500 against the equal-weight S&P 500 since 2006, revealing that the equal-weighted version has slightly outperformed during this timeframe. This can be attributed to the size factor, which suggests that smaller stocks tend to outperform larger ones. However, during periods of economic instability such as the Global Financial Crisis and the COVID-19 pandemic, the market cap weighted index has demonstrated a surge in value compared to its equal-weighted counterpart. Recently, we have witnessed another increase, which does not bode well for the broader market.

S&P 500 vs S&P 500 equal-weight

Value is Cheap

OK, we're stating the obvious here, but bear with us. Value has had a pretty impressive 12-months. The outlook is still very positive and the value-spread remains at elevated levels. We'll analyse the Price to Free Cash Flow (PFCF) factor.

The value spread is determined by calculating the average PFCF ratio of the top decile (most expensive stocks) and dividing it by the bottom decile (cheapest stocks). A high value spread indicates strong potential for value investors, while a low spread suggests the opposite. As the chart below suggests, it's a very good time to invest in value stocks. The current value spread is almost double the long-run average, indicating that value is primed for outperformance in the upcoming years.

Value spread - price to free cash flow

Cryptocurrency

Bitcoin was the most performant asset in Q1 2023. In the past week, it returned 2.9%. Ethereum, Polkadot, and Ripple all experienced promising gains also, varying from 2.9 to 12.9%. Binance Coin fell 2.7% within the week.

If you are interested in creating a diversified portfolio with multiple asset classes, you can use our Xplore ETF tool to do just that.

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