The S&P 500 hit its all-time high in the third quarter, just before a bout of volatility. Being that there is still no clear path out of the pandemic, that can be a bit shocking. While the financial and political media will likely tell you the market is trading on the most recent presidential election poll. The data suggests differently. Over the last decade, and longer, markets have binged on the sugar-buzz of government stimulus. It’s reassuring to invest when trillions of dollars are being pledged to prop up the economy. How long can it last? That is nearly impossible to predict. The Fed still has “dry powder” in its aresnal that it could pump into the economy if needed.
The bifurcation of investment markets has accelerated in 2020. The past few years have seen stock values generally rise. However, peeking under the hood shows those increases are concentrated in small pockets of the investable universe, primarily tech-based companies.
As you can see in the data below, the year-to-date returns of the S&P 500 ETF (US large-cap stocks) are positive. Expanding our lense beyond those 505 stocks, we see that US Small-cap, International, Emerging Markets, and Real Estate stocks are all negative.
Taking a deeper look to the breakdown of size, and growth versus value (commonly referred to style-box), the divide grows wider. Within just the US stock market over the last three months (left chart) large-growth companies increased 11% more than small-value companies. Looking at the last year, there is nearly a 60% difference in large-growth stocks compared to small-value stocks (right chart).
The financial media is quick to highlight the extreme performers. This feeds what behavioral finance calls Hindsight Bias. It is very easy to construct the perfect investment strategy of the 2010s. Is that the best strategy for the next decade? Be careful allowing too much of this noise to occupy your attention. Your car (hopefully) has a much larger windshield than rear-view-mirror. As financial professionals, we focus on positioning our clients for future success, not chasing last-years great ideas.
In the long-run, broad diversification tends to be the best strategy. A mix of different types of stocks, bonds, and other assets will never be the best 1-year return highlight on CNBC. That is a good thing. Time-tested, logical investing strategies for long-term investors. That is our focus.
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