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U.S. Equities Market Attributes July 2020

Investment in Innovation: Opportunities for Outperformance across the Market-Cap Spectrum

S&P GIVI® Japan and Major Single Factors Q2 2020

U.S. Equities Market Attributes June 2020

U.S. Equities Market Attributes May 2020

U.S. Equities Market Attributes July 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

The number of new daily cases of COVID-19 reported in the U.S. reached 77,000, a record level, as over 4.6 million people in the U.S. were infected (17.5 million globally), with over 153,000 deaths (677,000).

The first month of earnings season started slowly, but picked up, as 62% of S&P 500 issues, representing 75% of the index value, reported.  Companies took a little longer to review the COVID-19 situation and then decide what they wanted to tell the world (shareholders, competitors, and customers).  The reported earnings results had 82.1% of the issues beating their estimates, which had been lowered by 47.9% (always nice to ensure a beat), as earnings continued to get front-page news but didn’t get the front-page headline.  The U.S. Congress was in the public eye, but still was not the front-page headline, as the group returned after a break to battle COVID-19, not via the medical lab, but via negotiations to pass another (Phase Four) COVID-19-related aid package.  The Senate (Republicans) unveiled their USD 1 trillion bill, which will now be negotiated with the USD 3.5 trillion bill from the House (Democrats).  The key to the package appears to be an extension (potentially with changes) of the expired Federal Pandemic Unemployment Compensation, which gave an additional weekly unemployment benefit of USD 600 (the House bill brings it back to January 2021, the Senate cuts it to USD 200 until September 2020, then uses a formula based on wages with a cap after that), as well as direct aid to states (the House has USD 1 trillion for states and schools, the Senate has USD 105 billion for schools and no new aid for states).

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Investment in Innovation: Opportunities for Outperformance across the Market-Cap Spectrum

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John van Moyland

Managing Director, Global Head of S&P Kensho Indices

It is of no surprise to anyone following the markets of late that the returns of larger companies have generally fared better than their smaller brethren during the pandemic.  The extent of this dynamic was brought into sharp relief when looking at YTD total returns through May 29, 2020: the large-cap S&P 500® returned -4.97%; the S&P MidCap 400® returned -13.86%; and the S&P SmallCap 600® returned -20.81%.  In the small-cap segment, the Russell 2000 reflected the same story over this period with a return of -15.95%. 

Meanwhile, the equivalent market-cap segments of the S&P Kensho New Economies Composite Index, which seeks to capture the industries and innovation of the Fourth Industrial Revolution, have significantly outperformed their broad market peers by 3.96%, 9.35%, and a substantial 16.49%, respectively, over this same time period (see Exhibit 1).

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This persistent outperformance across market-cap segments illustrates the positive impact of the security selection effect and underscores the benefits of a robust, disciplined, and transparent framework when investing in innovation and growth.

This commentary will discuss our approach to capturing the New Economies and explore how persistent this pattern is over different time periods and weighting strategies.  Let’s start out with some context setting.

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S&P GIVI® Japan and Major Single Factors Q2 2020

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

The S&P GIVI (Global Intrinsic Value Index) Japan underperformed its benchmark index, the S&P Japan BMI, by 6.09% in Q2 2020. Since its launch in March 2012, the S&P GIVI Japan has underperformed its benchmark index by 62 bps per year, with a tracking error of 2.68%.

Following the sharp decline in Q1 2020, the Japanese equity market rebounded by 11.77% in Q2 2020, as measured by the S&P Japan BMI. However, the S&P Japan BMI posted -8.31% YTD. As in other major markets, the recovery in Q2 2020 was mainly boosted by government stimulus and good news in the fight against COVID-19. This quarter, the Japanese government approved a record stimulus package equaling about 40% of GDP to prevent COVID-19 from causing further economic deterioration. After lifting the National State of Emergency in late-May, the Japanese economy started to gradually reopen. While partially encouraged by these positive signs, investors stayed cautious amid the uncertainties around U.S.-China tensions and a second wave of COVID-19 cases. 

As the economy gradually reopened, almost all sectors showed signs of rebounding. Materials, Consumer Discretionary, and Industrials, which were severely hurt in Q1 2020, had strong comebacks, with double-digit returns this quarter. Hotels and Industrial REITs contributed the most to the mild recovery in Real Estate, while Office provided some drag. Information Technology was the bestperforming sector, due to increased demand for hardware and software support in the new normal of internet-based life. Health Care and Communication Services, the two sectors whose performance benefited from the COVID-19 crisis for providing healthcare products and supporting social distancing practices, respectively, continued to lead in Q2 2020 and reversed the loss from the previous quarter. Utilities was the only sector that posted a negative return, largely due to the dire economic projection. 

The underperformance of the S&P GIVI Japan in Q2 2020 was mainly due to the selection effect in Industrials and Information Technology.  

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U.S. Equities Market Attributes June 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

The number of new daily cases of COVID-19 reported in the U.S. rose to over 47,000, a record level; over 2.6 million people in the U.S. were infected (10.5 million globally), with over 127,000 deaths (511,000). Within the U.S., progress on combating the virus remained uneven (and unsure), as New York City, which was hit first and became an epicenter, started to open up, but several states reported significant increases in infections and hospitalizations (Arizona, California, Florida, and Texas). Some states considered reversing openings (Florida, Texas, and others have) and reinstating some restrictive procedures, which have become highly political. In a sign of the regional turnaround situation, New York (along with Connecticut and New Jersey) said it would require out-of-state visitors from “hot spots” (16 specific states) to quarantine for two weeks, similar to what some states did to those visiting from New York earlier in the year. Globally, the EU said it would reopen its boarders to nonessential workers from 14 countries (and possibly China), as it barred the U.S., citing the increasing COVID-19 reports. The bottom line for the virus is that no one knows, as for some, the situation has become more correlated with their political views than with science. The bottom line for the market, which believes in the market, is that eventually there will be a workaround (a cure, a treatment), and that the economy will recover. To that end, as stated, several areas that were hit early have improved, but others that were not as severely affected are now starting to be, with their reaction still in progress.

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U.S. Equities Market Attributes May 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

The grand Reopening of the U.S. began in May—come, buy, spend (if you have it; otherwise use your stimulus money), and enjoy the solitude of six feet as you scan your iPhone to pay (or for you oldies, use that archaic piece of plastic that you have not been using lately).  If by some chance you need to cough (as they told Arlo Guthrie), “turn your head.”  The U.S. started to reopen as the Memorial Day holiday kicked off not just the start of summer, but a return to what will be the new normal, with no one knowing what that will be, but most wanting to at least try.  The anticipated opening has been what has kept the S&P 500 up—36.06% from its recent March 23, 2020, low (down 10.10% from its Feb. 19, 2020, closing high).  Anticipation has been nice (did someone say, “Buy on anticipation, sell on reality?”), but now reality will start, along with the learn-as-you-go process and slow (or fast—we don’t know) continuance of opening; the key questions are, “If you open, will they come and spend?” and, “If they come, will they get sick?”  At this point, an opening, any opening, is welcome, as the Street has mostly dismissed 2020 earnings and is looking toward recovery signs, which are expected to be seen in a turn up in earnings in the second half of 2020—and that will be the true reality test for the Street.  At 27.7 times the expected 2020 EPS, there is no question as to why everyone is wearing a mask, as the Street is priced for 2021 (and even then it is high).  If we see the upward turn in the second half, then the current levels may be justified, but if not, the Street will need to reprice, and for those of you who quickly forget, the last repricing was from the Feb. 19, 2020, high to the March 23, 2020, low—a 33.9% fall.  In the “putting your money where your mouth is” reopening, the first major IPO since the virus spread to the U.S. was done, as insurance broker SelectQuote (SLQT) IPOed at USD 20, closing the month at USD 27.52, up 37.6%—ah, the good old days.

The U.S. market went into May after its best month (12.68%) since January 1987 (13.19%), as the focus changed to the start of the Reopening of the U.S. (most started on May 18, 2020, ahead of the Memorial Day holiday), with regions varying their approach and depth.  The initial key issue for the reopening in May was if consumers would come back, and June’s key issue will be if they would be safe to do so and spend.

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