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Today's market dislocations present long-term opportunities

Timely insights on the issues that matter most to investors.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Yana S. Barton, CFA, Portfolio Manager, Growth Team, Eaton Vance Management and Lewis R. Piantedosi, Director of Growth Equity, Eaton Vance Management

      Boston - The U.S. economy remains sound, but slower global growth and an aging profit cycle are weighing on investor sentiment and the stock market. While the macro picture has been bruised by fluid yet uncertain monetary and trade policies, we believe the recent market correction presents opportunities for long-term oriented investors.

      Anatomy of the sell-off

      As of this writing, the S&P 500 Index has declined approximately 7% from its September highs.

      The sell-off has been fairly broad-based, with cyclically-oriented and growth sectors -- such as energy, technology and communication services -- taking the brunt of the losses. Conversely, more defensive sectors such as real estate investment trusts (REITs), consumer staples and utilities have fared relatively better.

      The speed of the recent decline has been notable, with forward price-to-earnings (P/E) multiples also pulling back sharply. The current 12-month forward P/E for the S&P 500 Index is at 15.7x, a decline of 16% since the beginning of the year, and is now below the five-year average.

      At the same time, the average S&P 500 stock has experienced a price decline of 17% from its 52-week high, and more than 37% of S&P 500 stocks are off 20% or more from the same levels, suggesting a broad-based capitulation. This is further supported by median three-month correlations of daily returns of S&P 500 stocks, which has spiked to 57%, a level above the long-term mean,1 signifying increased co-movement, irrespective of fundamentals.

      Cyclicals vs. defensive

      Increased appetite for historically less-volatile, defensive stocks has caused extreme dislocations in price and subsequent valuations, going back to 1986. For example, the forward P/E spread between low-volatility stocks and cyclical growth stocks now stands at 4.1x, the highest in over 30 years, according to J.P. Morgan.

      Additionally, valuations for the utilities and consumer staples sectors, as measured by the forward (2019) multiples, are now above that of growth-oriented sectors such as health care and technology. This is a disconnect, we believe, as 2019 earnings and revenue growth for the aforementioned defensive sectors trail that of the market and health care and technology sectors (see the tables below).

      Blog Image Growth Sale Nov 29

      Bottom line: While investor sentiment has taken a hit, economic and company-specific fundamentals remain solid, and we believe the recent sell-off presents an opportunity for stock pickers and long-term oriented investors.