The most surprising thing about the market this year is not that the S&P 500 had its best first quarter since 1998. It is that only two of the S&P sectors outperformed the broader index in the first quarter: energy and industrials. The last time this happened was in the first quarter of 2000, as the tech bubble was peaking. While the US stock market was strong in the first quarter of 2011, it was also quite narrow, not usually a healthy sign, especially when the leaders have by and large led the market for the past 10 years.
Where is the value in the market today? In the assets people do not want, that have no momentum, and that are cheap. Three broad sectors and two broad themes stand out. The S&P 500 sectors are; financials, technology and healthcare, which are in the bottom decile of their historical valuation ranges. This means they have been more expensive 90 per cent of the time over the past 60 years or so. The themes are US mega cap and deep value, meaning low price to book value and high free cash flow yield.