Last Week’s Markets in Review: Understanding Preferred Stocks and Value Stocks

Global equity markets experienced another positive week, with U.S. stocks trailing their developed international counterparts. In the U.S., the S&P 500 Index rose to a level of 3,709, representing a 1.29% gain, while the Russell Midcap Index pushed 2.12% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 3.09% over the week. Moreover, developed and emerging international markets returned 2.01% and 0.90%, respectively. Finally, the 10-year U.S. Treasury rose to 0.95%, 5 basis points higher than the prior week.

It’s no secret that U.S. Large Cap Growth stocks captured the hearts and minds of investors in 2020. Even the most casual market participant can tell you that the Growth style led the rest of the stock market out of the doldrums in March and has outpaced nearly all other styles since. As of Friday’s market close, the S&P 500 index has returned 16.87% for the year, while the S&P 500 Value Index and the S&P 500 Growth Index have returned 0.09% and 31.71%, respectively. As a reminder, Growth-oriented stocks typically have higher Price-to-Earnings (P/E) ratios and are usually associated with companies that are growing earnings and/or revenue faster than their industry or the overall market. Conversely, Value-oriented stocks are known for having higher relative dividend yields, low price-to-book ratios, and/or low P/E ratios. They also tend to trade at a lower price relative to their fundamentals, and are thus considered undervalued.

What may be less apparent to investors is that this trend has begun to reverse course moderately over the last three months, with Value accelerating 14.42%, compared with Growth’s 12.92% increase. While we continue to advocate for appropriate portfolio balance between these two styles, we understand that early signs of a potential Value rotation may have many investors searching for ways to access this investing theme. We should not forget that stocks may be associated with the Value style because they have fallen out of favor with investors for one reason or another and trade at prices much lower than the company’s earnings would otherwise justify. In other words, the stock may be trading at depressed levels for legitimate reasons. As such, there is an added level of risk to consider that is inherent to Value investing.

One security type that investors tend to overlook, or are possibly unaware of, is Preferred Securities. Preferred Securities represent ownership in a corporation and have both bond and stock-like features. They usually pay a fixed level of income, have a par value, hold a credit rating, and trade on a major exchange. Often referred to as Preferred Stocks, Preferred Securities also generally experience less daily volatility when compared to common stocks, have a dividend that is paid out before dividends to common shareholders, and typically have a higher stated dividend payout than the corporation’s common shares. Preferred Stocks have also shown an 83% correlation to U.S. Value stocks over the last two years, which makes them a potential consideration for those investors looking to add a Value allocation to their portfolios, along with income potential, without being fully exposed to the potential risk that a pure Value strategy might entail.

It’s essential to keep in mind that Preferred Securities, although generally less risky than Value-oriented stocks, still carry substantial risk that should be reviewed and understood before considering an investment. As such, preferred stocks may not be appropriate for all investors. Overall, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework consistent with their objectives, timeframe, and tolerance for risk.

We recognize that these are very troubling and uncertain times, and we want you to know that we are always here to help in any way we can. Please stay safe and best wishes for a happy and healthy holiday season.

Other Data Sources: Equity Market and Fixed Income returns are from JP Morgan as of 12/18/20. Rates and Economic Calendar Data from Bloomberg as of 12/18/20. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using GICS methodology. S&P 500 sector performance represents total return figures sourced from Bloomberg.

Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.