Resist over-indulging on the hot stock flavor of the moment
As published in the Minneapolis Star Tribune 11/14/2020.
With the presidential election now behind us, investors need a new uncertainty to ponder. Fortunately, the markets are seldom short on subject matter.
The recent action in equities has been notable, not for how much stocks went up or down, but because of which stocks went up and down. When comparing year-to-date performance of the major benchmarks, it’s still the Nasdaq (up roughly 32%) and everything else. The S&P 500 has gained 11% this year, while the Dow and smaller-cap Russell 2000 are only 3-4% higher.
Those numbers show investors’ infatuation with stay-at-home technology stocks, but the trends have recently flipped upside down. Spurred in part by encouraging progress toward a COVID vaccine, many cyclical stocks and sectors that have lagged for most of 2020 now seem more attractive.
If our country, in other words, starts to glimpse a finish line for the current pandemic, it stands to reason that the stocks hardest hit by economic weakness would benefit more.
Since the start of October, the Russell 2000 has bounced 15%, doubling or tripling the return of the other three U.S. stock indexes. Last week showed even greater outperformance from small-caps, although the Dow — the other year-to-date laggard — also had a good week, relatively speaking.
The irony of this shift is that more and more investors have been seduced by the massive outperformance in megacap tech companies, only to see the tide recede once they jumped in the water.
Our clients own more than one U.S. stock strategy, different flavors of equities meant to complement one another. Our tactical strategy has outperformed its benchmarks this year while the other, equal-weighted strategy has produced more vanilla returns. Despite several inquiries from clients suggesting they ditch one in favor of the other, we politely point out the importance of owning strategies that behave differently in various market environments.
Walking into an ice cream shop and ordering vanilla might seem boring. On the other hand, it’s the bestselling flavor in the world because it works with everything.
This isn’t to say we are advocating for value over growth or small-caps over large. Some have suggested for years that a “Great Rotation” out of growth into value is imminent, or that international stocks have more attractive price-tags than U.S. companies. Neither outlook has proved profitable.
The truth is that nobody knows which strategy or style will perform best in the months (or years) to come. One lesson reinforced by the pandemic is that financial markets are inherently unpredictable in the short term. To be a successful stock investor requires embracing the unknown.
Rather than trying to select the single best-performing category, a better method is to invest in multiple strategies that complement each other.
Equities, historically, go up 70% of the time and you’re unlikely to guess correctly when the other 30% will be. Rather than trying to time the market or the current trend, do the smart thing and own disciplined strategies you can feel confident in over time. Experience has taught us that’s a much more successful approach than trying to pick the flavor of the month.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.