Last day of November 2017
This has been a remarkable year, to say the very least. As pundits often say, the market has been climbing a “wall of worry” all year, punctuated by occasional upward bursts — and a few setbacks, too, but not many. Today is month end, and it ended with a bang!
Since the election last year, the media — including the financial media — has been overflowing with pessimism. Everything from trade wars with China and Mexico, to real war with North Korea, has been our stable diet. U.S. government debt topping $20 trillion suddenly has everyone’s attention. Brexit is expected to cause a Euro meltdown any minute. On and on it goes.
Meanwhile, as disciplined investors, we remind ourselves that we’ve seen this before.
What is “this?” This is a broad consensus — the pundits and politicians and academics and other assorted characters all asserting with great confidence that they know something, and only a fool would think differently!
As of last Friday, the S&P 500 was up over 18% for the year1 and will be up over 20% through today, after the rally drove the Dow up over 300 points.2 But most of these gains have come in modest increments — a fraction of a percent each day, with very low volatility.3
What else is new?
Well, as a matter of fact, quite a bit. I read an interesting article the other day in The Wall Street Journal, worth a look.4 You may recall a few years ago we mentioned that growth stocks had been outperforming value stocks for an extended period — the opposite of what we have observed in the long run, but a pattern which does occur with some regularity. And sure enough, the very next year value stocks bounced back strongly.
Well, here we are again. In fact, kind of like the late ‘90s (the so-called “dot-com bubble”), we are seeing tremendous growth concentrated among a handful of tech companies; and this year, per the article, growth has outperformed value by 19%, close to the record from the late ‘90s. Of course, we all remember what happened after that — but in case you forgot, the article starts with a “growth versus value” chart that shows the huge reversal in that pattern. Value dominated thereafter.
You may recall that Dell was the best stock performer of the ‘90s (depending on the exact dates you pick to measure). Remember IBM in the ‘70s and ‘80s? Companies that changed the world, blazed new trails and came to dominate the landscape. Until things changed again. We’ve seen this before.
Top five companies — can you guess?
Would you be surprised to learn that almost 14% of the S&P 500 and 40% of the NASDAQ indices are made up of the top five companies, and that these companies are:5
No banks? No energy? Auto companies? What happened to GE? J&J? Seeing this really brings home to me the magnitude of the change our economy has experienced. Oddly enough, though, this time really is different, at least from the dot-com era. These really are big companies with big profits and huge cash hoards, not just huge valuations on tiny little companies with big ideas and napkin-based business plans.
But will it be different from the past cycles in which growth and value alternate, and value wins in the long run? Probably not.
What does this mean for me?
We hear a lot these days about stocks being at record highs — and they most certainly are. But does that mean they are overvalued? Frothy? All of them? Should we sell?! Well, no, except maybe to rebalance into bonds a little bit.
First of all — as we have been writing these past few years — international and emerging-markets stocks were “cheaper” by traditional valuation measures, and had been underperforming domestic equities. Happily, by staying committed to our allocations to these equities, we were well-positioned the last few years as they bounced back pretty strongly, although they still appear to be cheaper than domestic stocks. And as the article points out, even as growth stocks have gotten more expensive, value stocks have not.
What this means for you and for me is that being well-diversified and disciplined is working! We have reaped the rewards wherever they came from year by year; and even as we are invested in stocks that look expensive (remember, they may still go up), we are invested in cheaper stocks here and all over the world, and in bonds, too.
Heading into the holiday season
As we head into the final month of a tumultuous year, we wish all of you the happiest of holiday seasons. And we want to give special thanks to all those brave men and women serving in our armed forces around the world — making it possible for us to enjoy our holidays, and for all the world’s peoples and economies to thrive, as so many are now.