“To everything there is a season, and a time to every purpose under the heaven.” ~Ecclesiastes 3:1
Yes, that is right, this is not just a song by The Byrds, it is scriptural wisdom; whether one learned it in Sunday school or by singing along to the radio, it is just as true. For what seems like years now, we have been talking about the market’s unhealthy skew toward large-growth companies. Since the financial crisis the “market,” as judged by most, has gone up considerably, but this is really just the large U.S.-centric indices, like the S&P 500, which are dominated by technology firms. The rising tide has not lifted all boats, and investors who buy value stocks, or the stocks of smaller companies and those headquartered overseas, have seen little in the way of growth.
These trends happen in the market all the time. The decade of the aughts saw the exact opposite occur; the rationale was that we were coming off of the tech bubble. In response to the tech bubble and the economic downturn triggered by the 9/11 attacks, the Federal Reserve (Fed) lowered interest rates to levels that seemed very low back then. This had the effect of inflating a housing and commodity bubble, which brought on the financial crisis in 2008.
Since the financial crisis and the policy aftermath, we experienced an incredibly slow economic recovery with overall economic growth at almost half of historic U.S. levels. The result was that investors sought companies who could grow even if the economy did not. At some point in market behavior momentum takes over, and as always, the market overshoots. Recently, the unprecedented reaction to the COVID-19 pandemic exacerbated this already-entrenched trend, and the differential between growth stocks and value stocks approached record levels.
Some of our clients have even taken to making fun of me (to my face – they always make fun of me behind my back) because of my insistence that this will pass. The season will change, value is coming.
Not only has my tune not changed, but we may have already seen the change. In the fourth quarter of 2020, large-growth companies as represented by the Russell 1000 Growth index were up 11.39 percent while large value stocks as represented by the Russell 1000 Value were up 16.25 percent. Small-company stocks, as measured by the Russell 2000 index, were up 31.37 percent. The stocks of companies headquartered outside the U.S. also outperformed, as did companies from emerging-market countries.
In other words, diversification away from large U.S.-based technology companies worked for the first time in a long while. That trend has thus far continued into 2021. Through last Friday, January 15, our custom-blended global equity index, which is fully diversified in stocks of all shapes sizes and nationalities, was up 2.7 percent while “the market,” a.k.a. the S&P 500, was up 0.39 percent.
The trigger for this season of change appears to be Wall Street’s hope for stimulus. For what it is worth, the day of our new president’s inauguration, we had a reversal: the focus on the word stimulus was translated as economic growth, but then the reality of stopping pipelines, raising minimum wage, and regulating everything in sight momentarily put everything on hold. That is what happens in the market: Nothing happens in simple straight lines. There is always a trend and then a wait-a-minute moment.
We have seen false starts in this transition before, and it is possible that is all the last four months have been. These larger trends do, however, go on for years, and lately a decade seems to be the life span. “To everything there is a season…a time to plant, and a time to pluck up that which is planted.” We appear to be in the time to plant some diversification, while we pluck up those U.S. technology profits. To put it in terms of The Byrds, it may be time to “turn, turn, turn.”
Chuck Osborne, CFA