Stock Market Bulls Versus Bears: What's Winning In 2017 & Why

02/21/17 07:38AM EST

Stock Market Bulls Versus Bears: What's Winning In 2017 & Why - Pamplona Statue group of Encierro2

It's been a whirlwind past few weeks in financial markets. The S&P 500 continued higher (up +5% already this year) to the dismay of stock market naysayers everywhere. "I can't stress how important it’s been to be Bullish Enough" on the stock market, writes Hedgeye CEO Keith McCullough in this morning's Early Look.

A quick review of what's working in 2017 reveals exactly that. In the Chart of the Day below, we show the S&P 500 broken down across a variety of "style factors" (i.e. market attributes like large-cap versus small cap stocks).

The chart below compares the performance of stocks in the top quartile (top 25%), based on these style factors, against the stocks in the bottom quartile (bottom 25%). Sticking with the large-cap, small-cap example, it shows the top 25% of larger cap stocks in the S&P 500 are up +5.2% year-to-date versus +2.3% for the bottom 25% of smaller cap stocks.

High Beta Vs. Low Beta

The key callout is the performance of high beta versus low beta. High beta stocks are stocks most tethered to the direction of the stock market. If the S&P 500 heads higher or lower so too will high beta stocks. The highest of high beta stocks means the move could be particularly profitable as the market heads higher (since these stocks rise in excess of the market move). The downside is also more painful if the broader market falls.

Here's the breakdown of performance year-to-date:

  • High Beta: +6%
  • Low Beta: +3.3%

Even more drastic is 6-month performance. High beta is up +16.7% versus low beta +0.5%.

Then there's high beta and low beta sectors. Financials (XLF) are more tethered to moves in the market (i.e. high beta) versus low beta Utilities (XLU) stocks. Check out the breakdown year-to-date:

  1. Financials (XLF): +5.3%
  2. Utilities (XLU): +2.1%

Stock Market Bulls Versus Bears: What's Winning In 2017 & Why - 02.21.17 EL Chart

U.S. Growth & Inflation Accelerating

The market moves were supported by economic data last week. Year-over-year growth in both retail sales and inflation are near or above 5-year highs

  • Retail Sales: The year-over-year growth rate in retail sales hit 5.6% yesterday, a level not seen since March 2012. Digging deeper into the report, the retail sales “control group” (a good proxy for the input into the consumption component of US GDP) accelerated to +4.0% year-over-year growth for the month of January versus +3.4% growth in December.
  • Consumer Price Inflation: Core inflation just hit the highest level in 5 years. CPI accelerated to +2.5% year-over-year in January versus +2.1% in December. Inflation has now accelerated for the 6th consecutive month.

Stock Market Bulls Versus Bears: What's Winning In 2017 & Why - growth inflation

Bottom Line

You might be wondering, where do we go from here? We expect the U.S. economy to continue to accelerate. That will be supportive the U.S. stock market going forward. 

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