August witnessed a significant reversal in risk appetite mid-month in response to a succession of hawkish Fed guidance. This bought an end to the +18.6% two-month rally that started on June 16 and peaked on Aug. 16. Since the mid-month peak, the FT Wilshire has declined -8.1%, producing a -3.8% move for the month of August.
Exhibit 1: August brought an end to the two-month rally
August saw a rotation back to small cap and value stocks
The mid-August reversal also produced a rotation in style performance. The table below shows that most of the underperformance of large cap relative to small cap in August was attributable to the larger negative contributions from the financials, digital info and services, health care and technology sectors.
Exhibit 2: Four sector-weighted contributions account for small cap outperformance
Rising bond yields cause growth to lose momentum vs value
Rising bond yields impacted the highly valued long duration growth stocks in August and this resulted in the growth style (with its large exposure to the technology and digital information sectors) losing momentum relative to value as the month progressed.
Exhibit 3: Two sector weighted contributions account for growth underperformance
Still a way to go before the growth vs value trade reverts to 2016/17 levels
Exhibit 4 puts the growth vs value rotation into a longer perspective. Despite the scale of value outperformance so far this year, the relative trade still has a long way to go in order for it to mean revert back to 2016/17 levels (parity levels).
Exhibit 4: The long term perspective on Growth v Value relative performance
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