Quick Market Thought:
Just because the market had recouped its losses from earlier this year doesn’t mean we predict smooth sailing ahead.
With less than 80 days until the November elections, the political mudslinging is ramping up. As investment strategists, we think it’s policy, not politics, that matters.
To that end, we believe that putting our economy back on firm footing depends largely on controlling and containing the spread of COVID-19, particularly as flu season approaches. We remain alert to the fact that both the economic and market recoveries could quickly reverse course.
Ok, now on to “Trendy Investments Are Long-Term Losers”
Despite the pandemic’s impact on our economy, in the stock market, the big continue to grow bigger.
Five mega-stocks—Facebook, Apple, Amazon, Google and Microsoft—have returned between 13% and 70% this year and now make up more than 20% of the market capitalization (or size) of the S&P 500 and 40% of the NASDAQ Composite index.
Is it time to throw in the towel on diversification and double down on a handful of high-growth tech titans? Definitely not. In our estimation, the trend-chasing that leads to outsized investment returns over the short-haul seldom pays off for long-term investors.
Market history is full of examples of outsized returns concentrated among a few hot companies or sectors that tempt investors—only to disappoint them in the end.
Given tech stocks’ singular performance today, it is easy for investors to draw a precarious parallel to their legendary surge in the late 1990s and 2000, which, as we know, ended in ostentatious demise. It only takes three words to send a little shiver up investors’ spines: Pets-dot-com.
After the tech bubble burst, investors searching for growth piled into shares of companies located in the “BRIC” countries—Brazil, Russia, India and China. That worked for a while, until it didn’t. U.S. stocks have outpaced emerging markets stocks by more than 4-to-1 over the last decade. (We’d insert a joke here about stocks falling like a BRIC, but we think it’s self-evident.)
Perhaps the closest comparison to today’s concentrated market leadership goes back to the so-called “Nifty 50” of the 1960s and 1970s. These were 50 “sure thing” stocks that traded up to lofty valuations. The thinking was that the likes of McDonald’s, IBM, Polaroid, Coca-Cola, Eastman Kodak and others were so stalwart and reliable that you could buy them at any price, hold on forever and they’d make you rich. Many of the Nifty 50 blew up, but only after investors of all stripes piled into them.
It’s not only high-growth equities that have attracted trend-chasers recently. Gold has also been on an amazing tear over the past few weeks, with many investors worried that massive government spending will generate massive inflation. But so far that hasn’t happened—just as it didn’t happen after the huge government outlays during the Financial Crisis.
That isn’t to say inflation can’t ever come back, but even with the Consumer Price Index’s recent 0.6% increase last month, inflation by that measure is only up 1% over the last year. Gold advocates also argue that with interest rates so low, the old argument that gold is a lousy investment because it never pays a yield is just irrelevant now. Those arguments might have seemed compelling…until this week when yields began rising and gold’s price began falling.
There’s a phrase that sums up all this trend-chasing—recency bias. Investors will see what’s been profitable lately and conclude the trend will continue well into the future. It’s taken hold with the big tech stocks, it was on a tear with gold until a couple of days ago and it’s also beginning to see some life among value stocks in recent days.
Our advice is to avoid trends, remain diversified and invest with managers who know how to spot opportunities and avoid large market losses. Do you have a sell strategy or stop-loss system to avoid large market losses? If not, talk to us.
