This is getting to be a habit.  Like Bill Murray in Groundhog Day[1], I keep waking up to what seems like the same situation, only different.

There I was, happily preparing to tell you that the S&P 500 (and most of the other equity indices) just had the best August in quite a while, rising more than 7% and now up close to 10% year to date[2], when the first few days of September happened.  One more time, my message seemed as old as yesterday’s newspaper, and I found myself waiting day to day to see how the renewed volatility would play out before putting pen to paper (so to speak).

We have been communicating a lot about a handful of huge growth/technology stocks, the biggest stocks by far, with Apple soaring well north of $2 trillion in market value[3] and Amazon close behind.  Suddenly Tesla is worth more than all the other car companies; just like that, Tesla would rank in the top ten of the S&P 500 if it were in that index.  But last week S&P chose not to add Tesla, and did not comment on this move[4].  Sometimes all this leaves my head spinning.

Is there a point to all this?

Yes, sorry to digress.  As we have been saying, “the market” is not highly valued, most of the 3,000+ stocks in the US have not raced to nosebleed valuations, and, in fact, most are still negative year-to-date.  A few dozen growth stocks have provided the return and have become highly valued, much more so than the rest of the stocks in the US and the rest of the world.

A few quick numbers to illustrate the point.  Year-to-date returns for value and growth indices ending in August[5]:

Russell 1000 Growth                               30.47%

S&P 500                                                    9.74%

Russell 1000 Value                                  -9.35%

Russell 2000 Value (small cap value)    -17.71%

A huge spread between the performance of growth and value stocks, and also between large and small stocks.  If you think “the market” is risky, perhaps consider that the few stocks that have run so far so fast might represent more risk, and that disciplined rebalancing in the portfolio, which “sells the winners and buys the losers” and maintains the right level of exposure to stocks overall, also adjusts the balance between value and growth and large and small when those get out of whack.

So, what happened in September?

For the first five trading days of September, through Tuesday, those big growth stocks fell precipitously, so much so that the tech-heavy NASDAQ index entered correction territory (down more than 10%) after the bad day we had Tuesday.  That is very fast.

A few numbers, returns for those five days[6]:

Russell 1000 Growth                                        -7.68%

S&P 500                                                           -4.78%

Russell 1000 Value                                           -2.24%

Russell 2000 Value (small cap value)               -2.16%

When things went suddenly south, large growth stocks, the ones that have garnered all the headlines and delivered eye-popping returns, took the beating.  Value and small cap fell less.  Some of you may recall that we have seen this show before, back in 2000.  The large growth tech stocks had a long run of success, followed by a long run of bad results starting in March 2000.

A disciplined portfolio that maintained allocations to value, small and international stocks did fine in the ten years after 2000, while investors who chased the trend into the tech stocks experienced what was thereafter called “the lost decade.”

No one knows when we will experience something like that again.  It might have started last week, or maybe the growth names have even farther to run before things change.

Best regards,

Roger Hewins

President and Founder

Roger Hewins

 

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.

[1] An amazing movie, if you haven’t seen it, you should!  There is a lot more to it than it appears at first watching.  You can read about it here: https://benjaminmcevoy.com/philosophy-groundhog-day/

I spared you the very long and dense Philosophy Now article, this one is a quick read.

[2] Source: Morningstar Direct

[3] Source: Yahoo! Finance

[4] Banerji, G., & Wursthorn, M. (2020, September 08). Why Tesla Was Left Out of the S&P 500. Retrieved September 10, 2020, from https://www.wsj.com/articles/why-tesla-was-left-out-of-the-s-p-500-11599579707

[5] Source: Morningstar Direct

[6] Source: Morningstar Direct

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