The performance leadership of a handful of technology stocks over the past few years has been a dominant theme. In fact, such unmatched gains have captured similar potential risks as the technology bubble of the early 2000s. Although it is very difficult to gauge whether a similar event may transpire, the reality of concentrated growth within one segment of the U.S. stock market has been a widely discussed topic in our commentaries. The premise of such discussions attempts to objectively educate investors that a diversified approach to long-term investing should still be viewed as favorable. The hindsight power of chasing performance within a handful of highly overvalued concentrated stocks has never consistently benefited investors (from a historical standpoint). An eventual cycle shift tends to occur, and such a shift has been consistently evident over the past 30 years. In fact, my last commentary focused on the notion of sensible decision making, which addressed the concept of remaining sensible to emotions that may push us to chase performance. It just so happened that last week’s market data brought context to that commentary. Lucky timing, to say the least.
In an unprecedented move last week, the S&P 500 Value Index posted its strongest relative performance to the S&P 500 Growth Index since May 2009. That is the best weekly performance spread in over 11 years. If you are wondering as to what the catalyst may have been, the answer can have differing opinions depending on who you ask. Our view is one that points to the beginning stages of a leadership cycle shift. This is not a new concept and it is the simple nature of how the markets operate. The stature of value stocks, or value investing, considers a risk centric decision-making process, one that is grounded in fundamental well-being rather than momentum and overvaluation. Historically, such an approach has provided for an allocation that has benefited during times of economic uncertainty. Unfortunately, that did not occur during the latest COVID-19 bear market, which left many professionals in the industry perplexed. Their choice was either to remain grounded in a sensible investing approach for a client’s life savings, or consciously allocate assets to a highly overvalued segment of the domestic stock market. The sensible decision was simple – remain grounded in what makes sense for the long-term.
As we look ahead and attempt to extrapolate cycle shifts, it is imperative to understand that nothing simply occurs because the masses expect them to. The performance leadership concentration of the U.S. stock market has certainly skewed the perception of what it means to be diversified for the long-term, yet our message continues to urge caution in an emotional shift to momentum chasing. As the economic landscape transitions to an eventual full recovery, the likelihood of renewed growth across numerous sectors of the market may be in investors’ favor. The catalyst for growth may be tied to further fiscal policy adjustments or even monetary policy decisions, all to skew sentiment to the upside. Economic data releases last week revealed better than expected small business optimism figures, subdued inflationary pressures, stronger than anticipated retail sales, and a manufacturing backdrop that has increased its capacity utilization. These are all signs of an economy picking itself up. As a result, the S&P 500 Industrials sector outpaced the S&P 500 last week by one of the highest spreads on record. This is not to suggest an immediate linear path to recovery; rather, it may suggest the beginning stages.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg.
All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rat