The S&P 500 finished up 0.80% for the day

Highlights: 

Market Recap: The S&P 500 finished up 0.80% for the day, closing at 2834.41.  The US 10 year yield rose 2 basis points, closing at 2.42%. The VIX dropped over -12% and closed at 18.06.  Gold also finished down -0.42%.

Factors: Over the last 12 months, the strongest factors are low volatility, dividend appreciation, growth, and quality.  The laggards have been value and small capitalization. In the second chart, we illustrate the factor performance relative to the S&P 500 (SPY).  It is clear that dividend growth, low volatility, growth, and quality were the strongest factors.

Low Volatility versus High Beta: Low volatility has bounced recently relative to high beta.  This a good ratio to monitor in an effort to observe risk preference among market participants.  The ratio (moving up favors low volatility) bounced off support and the 200 day moving average. It looks set to challenge the highs set at the end of 2018.  The relationship correlates inversely with the broad stock market.

Momentum: Momentum relative to the S&P 500 has rallied to the 200 day moving average on recent outperformance.  The momentum factor would have rotated to defensive names at the beginning of this year, based on the weakness in the more offensive positions during the fourth quarter of 2018.  That hurt momentum at the beginning of the year. Recently, however, momentum has staged an impressive rally.

Small Caps: The small capitalization style has continued lagging relative to the broad stock market (S&P 500).  This was an early warning sign last year that equity market volatility was set to pick up. Small caps have broken down relative to large caps, one of the main reasons that we suggested raising cash out of equity a few weeks ago.  This had nothing to do with trade issues. The chart below demonstrates the relationship between volatility (blue line: 20 day smoothing of inverse volatility) and the ratio of small caps to large caps (red and green line). Is the volatility spike over or are we just witnessing the tremors before the earthquake?

Dividend Appreciation:  Dividend growth is one of our favorite styles of investing.  The reason is that you get a multifactor approach with quality, value, and low volatility all being represented in dividend growth indices.  Dividend growth has been strong over the last year. Since the start of the year it has consolidated relative to the S&P 500, until recently where it has bounced off support and rallied to recent highs.  Will it continue to bounce?

Futures Summary: 

News from Bloomberg:

Latest on the U.S. and China: Trump is poised to sign an order restricting U.S. firms from using telecom gear made by companies that pose a security threat, a move that may be aimed at Huawei. Xi Jinping said foreign efforts to reshape other nations were "foolish." Analysts warned China may sell Treasuries to bolster the yuan and Trump last night asked the Fed for some stimulus to match PBOC policy and push U.S. growth to 5%. Here's a QuickTake on how the trade war got to this point.

China's economy lost steam in April even before the trade war escalated. Industrial output, retail sales and investment all slowed more than economists forecast. The state sector continued to boost investment while private business eased off, and growth in manufacturing investment came in at the slowest pace in data dating back to 2004.

The IEA slashed its oil demand growth forecast, citing an economic lull in Asia and disappointing consumption from China, Japan and Brazil. Still, crude supplies are set to plunge sharply this quarter as U.S. sanctions threaten to drag Iranian crude output to the lowest since the 1980s.

Odds of a Fed rate cut in the next year are about 70%, Jeffrey Gundlach said, and the probability of a recession is high. "Twelve months, I'd give you a recession probability that's 50-50. Next six months, I'd probably have it down at 30%," he said. Bonds are "extremely exposed" to a downturn in the dollar, he warned, because foreign buyers have purchased Treasuries without currency hedges.

U.S. stock-index futures and European shares fell as the weak Chinese data spurred global growth concerns. Asian markets bucked the trend as the Shanghai Composite rallied on prospects for more stimulus. The Aussie and kiwi slumped. Treasuries, gold and the yen rose. Oil fell. Industrial metals were mixed.