Market action this year has confounded and perplexed. Meaning, it has been pretty much business as usual, although with more exaggerated swings. The action should demonstrate more than ever that short-term market gyrations are completely unpredictable. Anyone who in late March publicly said the market would hit new records by summertime would have been promptly escorted to a padded cell. This short-term unpredictability, however, is a key factor leading to outsized, longer-term gains. If it was easy, everyone could do it, which would bid prices up, reducing future returns. More on that aspect later.
The S&P 500, having experienced its fastest ever 30 per cent decline last winter, has now rebounded out of a bear market faster than ever. During the COVID plunge, 17.5 per cent of all investors and 30 per cent of those over the age of 60 are reported to have panic sold all of their stock holdings. This statistic is unfortunate and may seem surprising, but the market is driven down when there are more sellers than buyers. Clearly, there were a lot of aggressive sellers.
When the market reversed course, it did so with similar vigour. Following are market performance stats from several key market indices from Jan. 1, 2020, and from February market peaks as well as March market lows until the end of August. In percentages, the TSX was down 3.2 year-to-date and 8.0 from February peaks, but up 47.1 from March lows. The Dow Jones, which can be considered a proxy for value stocks, was down 0.4 year-to-date and 3.8 from peak, but up 52.9 from lows. The S&P 500, which is the broadest U.S. market, was up 8.3 year-to-date, 3.4 from the peak and 55.5 from lows. The Nasdaq, which is an index heavily weighted to growth technology and biotech stocks, was up an astounding 31.2 year-to-date, 19.9 from its previous peak and 71.6 from the lows. Many Nasdaq stocks are in the S&P, so it is obvious what type of stocks pulled up the S&P.
Since April, there have clearly been more aggressive buyers than sellers, but mostly for a handful of growth technology companies. Six companies, Facebook, Amazon, Apple, Netflix, Google (Alphabet) and Microsoft, are up over 50 per cent and represent all the gains in the index year-to-date, with the other 495 companies effectively averaging breakeven. These six companies’ average earnings and free cash flow yields are 2.1 and 2.0 per cent.
For comparison, I selected a sampling of six value companies including tech giants Intel and Cisco plus Verizon, Molson Coors, Kinder Morgan and CVS. While slower growing, this group still managed to more than double earnings and free cash flow over the past decade. Their average earnings and free cash flow yields are 8.8 and 11.8 per cent. The six growth stocks are trading at a valuation four times pricier than the sampling of value stocks.
Not since the 1998-2000 era has growth been valued this richly, relative to value. Growth stocks have outperformed value stocks over the past decade with a significant spike in the trend recently. Where it ends nobody knows, but when it ended in early 2000, growth stocks fell through a trap door taking many years to recover.
This next part is somewhat conjecture on my part of what may be partially responsible for the surge: getting back to the thought if it was easy everyone would do it, driving prices up and taking away future profits. What occurred is millions of, especially younger, folks were sitting at home, needed entertainment and received regular income checks from the government. New internet brokerage accounts exploded with companies reporting double their normal growth rates. One newer online brokerage doubled its total number of accounts in three months. These new “investors” (maybe speculators) gravitated to names they were familiar with and where making money had been “easy,” namely the big tech companies. New “investors” think profits will be as easy going forward as it has been in the recent past. Many will be sorely disappointed.
Investing in the stock market is easier than many perceive but not this way. While currently lagging the performance of the big growth stocks, the Titanium Strength Portfolio will continue to plod along with minimal effort, delivering excellent returns for the long run. While it’s frustrating watching others get rich quick, it’s also a good time to remind ourselves of the wisdom imparted in the fable The Tortoise and the Hare.