The investment markets have been relatively quiet over the past few months. Steadily, they have climbed out of a market collapse to just barely reach new market highs. And while I would love to say “See, I told you so,” that really would not be fair. Even I could not have predicted the sprint back to the top, and I never really claimed that would be the investment experience this year. What I did predict – and continue to predict – is that investors are in for a bumpy ride, but a profitable one over the long-term. The last few days in the market are proving my point, at least the bumpy part.
If you have been paying attention, you surely have heard that the market rebound this year has been dominated by a very few technology companies. Microsoft, Apple, Google, Amazon, and Facebook – these five companies (6 if you count Google as two separate companies) make up about 25% of the S&P 500 Index as a whole and have driven much of the market gains we have seen since March. These rising tide stocks have floated everything else looking at the entirety of the index. However, there are still large swaths of the market that continue to experience doldrums. For example, consider Figure 1.
The S&P 500 can be broken simply between growth companies, like technology companies, and value companies like traditional banks, utility companies, and consumer staples (think Coca Cola). While growth stocks have seen a huge surge this year – again driven mainly by a handful of technology companies – the value side of the market is still underwater for the year and, consequently, not nearly as overvalued as the growth side. And, comparing the interest rate investors can receive on the 10-year U.S. Treasury Bond (0.68%) with the dividend yield on S&P 500 value stocks (2.59%) these stocks continue to look attractive for investors.
I am certainly not advocating selling everything and concentrating in Large Value stocks. Investors should remain diversified and focus on their long-term investment strategies when considering portfolio moves. However, I merely point out that some parts of the market look more favorably valued than others – in other words, irrational exuberance does not pervade the entirety of the market.
These same dynamics play out time and time again over long periods. This period does not present any new challenges, rather the same challenges presenting themselves differently. During the coming weeks you will hear our nation’s leaders tell a different story. To garnish votes, they will appeal to our darkest fears, disappointments, frustrations and anxieties to paint “the other side” in as ruinous a light as possible. As an investor, do not be fooled. No political party in this country has the power to completely destroy or propel the economic engine of our free-market society and thus make or break the market. That power belongs to the billions of people around the world that participate in good work, innovation, trade, discovery, justice, helping and healing every day. Their collective self-interest is simply too great to be impeded – over the long-term – by shifting public policy.
I plan to vote in November. I am as concerned about the direction our country is taking as relates to taxation, domestic policy, international policy, and defense strategy. But, as an investor I am confident in the long-term trajectory of global economic expansion – the markets, historically, have been too.
*Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions, however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market. The Standard & Poor’s 500 (S&P 500) is a stock market index containing the stocks of 500 American corporations with large market capitalization that are considered to be widely held. The S&P 500 is unmanaged and cannot be invested in directly.