The market volatility which started on Friday of last week in the bond market and quickly spread to equity markets has sparked much chatter and speculation in the financial world. As the turbulence continued into this week, market commentators began to draw comparisons to the 2013 Taper Tantrum, which sent shockwaves through the financial world and delayed the global economic recovery.
The Taper Tantrum and last week’s moves were both sparked by speculation that the Federal Reserve may increase its key interest rate faster than expected. If we assume that the Fed will, at some point in time increase interest rates, it is viable to suggest that there will be another ‘Taper Tantrum’ as some time in the near future.
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To try and understand what investors should expect when the inevitable happens, Credit Suisse’s US Equity Research Team have taken a look back at performance trends during the Taper Tantrum, analyzing, size, style, industry group and thematic performance during the peak to trough decline that occurred around the late May taper announcement.
The Taper Tantrum: What to buy and what to avoid
The broad market pullback that occurred around the late May taper announcement was much milder and much shorter in duration compared to other recent shocks. The peak to trough decline for the S&P 500 was 5.8%, lasting 23 trading days. The other major indices bottomed on the same day.
The industry group that was hit the hardest during this short, sharp sell-off was REITs. REITs sold off by around 12% over the 23 trading day period. The second worst performing industry group was Diversified Financials with a decline of just under 5%. Trends were inconsistent across the market cap spectrum. Growth beat value within small and mid-cap, but value beat growth in large-cap. Mid-caps were hit hardest.
Interestingly, small caps were most resilient, outperforming mega caps and large caps. Speculating why mid-caps were the worst performing group, Credit Suisse’s analysts opine that this market segment is often the risk trade for large-cap investors and hedge funds, which leads to increased volatility during sell offs. The most resilient sectors were mega-caps, Banks, Insurance, Consumer Services, small-cap Retail and small-cap Medical. The S&P 500 NTM P/E fell from 16.4x to 15.1x, peak to trough.
This time around the sell-off hasn’t been quite so brutal. As of 13 September, the median S&P 500 NTM P/E eased slightly to 17.6x from 18.0x at the end of August. While small-caps and dividend stocks continue to look overvalued according to Credit Suisse’s model:
“Small caps don’t look cheap on our model, but valuations continue to be less onerous as those of large cap. Our Russell 2000 model is now at 0.75 standard deviations vs. its +30 year average, down from 0.86 at the beginning of September. Relative to large caps, small caps continue to look deeply undervalued, as our small/large relative model is just off of its 1990 low.”
Further, even after recent declines Credit Suisse’s US equity analysts believe that most sectors remain overvalued barring Tech HW & Equipment, Transportation, Consumer Services, Retailing, Diversified Financials, and large cap Media.