Posts tagged ‘mid cap’
Life has been challenging for the bears over the last four years. For the first few years of the recovery (2009-2010) when stocks vaulted +50%, supposedly we were still in a secular bear market. Back then the rally was merely dismissed as a dead-cat bounce or a short-term cyclical rally, within a longer-term secular bear market. Then, after an additional +50% move the commentary switched to, “Well, we’re just in a long-term trading range. The stock market hasn’t done a thing in a decade.” With major indexes now hitting all-time record highs, the pessimists are backpedaling in full gear. Watching the gargantuan returns has made it more difficult for the bears to rationalize a tripling +225% move in the S&P 600 index (Small-Cap); a +214% move in the S&P 400 index (Mid-Cap); and a +154% in the S&P 500 index (Large-Cap) from the 2009 lows.
For the unfortunate souls who bunkered themselves into cash for an extended period, the return-destroying carnage has been crippling. Making matters worse, some of these same individuals chased a frothy over-priced gold market, which has recently plunged -30% from the peak.
Bonds have generally been an OK place to be as Europe imploded and domestic political gridlock both helped push interest rates to record-lows (e.g., tough to go lower than 0% on the Fed-Funds rate). But now, those fears have subsided, and the recent rate spike from Ben Bernanke’s “taper tantrum” has caused bond bulls to reassess their portfolios (see Fed Fatigue). Staring at the greater than -90% underperformance of bonds, relative to stocks over the last four years, has been a bitter pill to swallow for fervent bond believers. The record -$9.9 billion outflow from Mr. New Normal’s (Bill Gross) Pimco Total Return Fund in June (a 26-year record) is proof of this anxiety. But rather than chase an unrelenting stock market rally, stock haters and skeptics remain stubborn, choosing to place their bond sale proceeds into their favorite inflation-depreciating asset…cash.
Crash Diet at the Buffet
I’ve seen and studied many markets in my career, but the behavioral reactions to this most-hated bull market in my lifetime have been fascinating to watch. In many respects this reminds me of an investing buffet, where those participating in the nourishing market are enjoying the spoils of healthy returns, while the skeptical observers on the sidelines are on a crash diet, selecting from a stingy menu of bread and water. Sure, there is some over-eating, heartburn, and food coma experienced by those at the stock market table, but one can only live on bread and water for so long. The fear of losses has caused many to lose their investing appetite, especially with news of sequestration, slowing China, Middle East turmoil, rising interest rates, etc. Nevertheless, investors must realize a successful financial future is much more like an eating marathon than an eating sprint. Too many retirees, or those approaching retirement, are not responsibly handling their savings. As legendary basketball player and coach John Wooden stated, “Failing to prepare is preparing to fail.”
20 Years…NOT 20 Days
I will be the first to admit the market is ripe for a correction. You don’t have to believe me, just take a look at the S&P 500 index over the last four years. Despite the explosion to record-high stock prices, investors have had to endure two corrections averaging -20% and two other drops approximating -10%. Hindsight is 20-20, but at each of those fall-off periods, there were plenty of credible arguments being made on why we should go much lower. That didn’t happen – it actually was the opposite outcome.
For the vast majority of investing Americans, your investing time horizon should be closer to 20 years…not 20 days. People that understand this reality realize they are not smart enough to consistently outwit the market (see Market Timing Treadmill). If you were that successful at this endeavor, you would be sitting on your private, personal island with a coconut, umbrella drink.
Successful long-term investors like Warren Buffett recognize investors should “buy fear, and sell greed.” So while this most hated bull market remains fully in place, I will follow Buffett’s advice comfortably sit at the stock market buffet, enjoying the superior long-term returns put on my plate. Crash dieters are welcome to join the buffet, but by the time they finally sit down at the stock market table, I will probably have left to the restroom.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), including IJR, and IJH, but at the time of publishing, SCM had no direct position in BRKA/B, Pimco Total Return Fund, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Birthdays are always fun, but they are always more fun when more people come to the party. The birthday of the current bull market started on March 9, 2009, and as many bears point out, volume has been low, with a relatively small number of investors joining the party with hats and horns. This skepticism is not unusual in typical bull markets because the psychological scars from the previous bear market are still fresh in investors’ minds. How can investors get excited about investing when we are surrounded by record deficits, political gridlock, a crumbling European Union, slowing China, and peak corporate margins?
Bears Receive Party Invite but Stay Home
Perma-bears like Peter Schiff, Nouriel Roubini, John Mauldin, Mohamed El-Erian, and David Rosenberg have been consistently wrong over the last three years with their advice, but in some instances can sound smart shoveling it out to unassuming investors.
While nervous investors and bears have missed the 125%+ rally (see table below) over the last three years (mitigated by upward but underperforming gold prices), what many observers have not realized is that the so-called “Lost Decade” (see also Can the Lost Decade Strike Twice?) has actually been pretty spectacular for shrewd investors. Even if you purchased small and mid cap stocks at the peak of the market in March 2000, that large swath of stocks is up over +100%…yes, that’s right, more than doubled over the last 12 years. If you consider dividends, the numbers look significantly better.
Doubters of the equity market rally also ignore the three-year +135% advance in the NASDAQ (see also Ugly Stepchild) in part because the 11-year highs being registered still lag the peak levels reached in March 2000. Even though the NASDAQ increased 9-fold in the 1990s, if you bought the NASDAQ index in the first half of 1999, you would have still outperformed the S&P 500 index through the 2012 year-to-date period. Irrespective of how anyone looks at the performance of the NASDAQ index, it still has outperformed the S&P 500 index by more than +200% over the last 25 years, even if you include the bursting of the 2000 technology bubble.
The point of all these statistics is to show that if you didn’t buy technology stocks at the climax of late 1999 or early 2000 prices, then the amount and type of available opportunities have been plentiful. The table above does not include emerging markets like Brazil, Mexico, and India (to name a few) that have also about doubled in price from the 2000 timeframe to 2012.
Heartburn can Accompany Sweet Treats
Being Pollyannaish after a doubling in market prices is never a wise decision. After three years of massive appreciation, those participating in the bull market run have eaten a lot of tasty cake. Now the question becomes, will investors also get some ice cream and a gift bag to go before the party ends? With the sweetness of the cake still being digested, there are still plenty of scenarios that can create investor heartburn. Obviously, the sovereign debt pig still needs to work its way through the European snake, and that could still take some time. In addition, although macroeconomic data (including employment data) generally have been improving, the trajectory of corporate profits has been decelerating – due in part to near record profit margins getting pressured by rising input costs. Domestically, structural debt and deficit issues have not gone away, and perpetual neglect will only exacerbate the current problems. On the psychology front, even though investors remain skittish, those still in the game are getting more complacent as evidenced by the VIX index now falling to the teens (a negative contrarian indicator).
Despite some of these cautionary signals, the good news is that many of these issues have been known for some time and have been reflected in valuations of the overall large cap indexes. Moreover, trillions of dollars remain idle in low yielding strategies as investors wait on the sidelines. Once prices move higher and there is more comfort surrounding the sustainability of an economic recovery, then capital will come pouring back into equity markets. In other words, investors will have to pay a premium cherry price if they wait for a comforting consensus to coalesce.
The other advantage working in investors’ favor is the lack of other attractive investment alternatives. Where are you going to invest these days when 10-year Treasuries and short-term CDs are yielding next to nothing? How about investing in risky, leveraged, illiquid real estate, just as banks unload massive numbers of foreclosures and process millions of short sales? If those investments don’t tickle your fancy, then how about pricey insurance and annuity products that nobody can understand? Cash was comforting in 2008-2009 and during volatility in recent summers, but with spiking food, energy, leisure, and medical costs, when does that cash comfort turn to cash pain?
Easy money and low interest rate policies being advocated by Federal Reserve Chairman Ben Bernanke and other global central bankers have sucked up available investment opportunities and compelled investors to look more closely at riskier assets like equities. With the large run in equities, I have been trimming back my winners and redeploying proceeds into higher dividend paying stocks and underperforming sectors of the market. Skepticism still abounds, and we may be ripe for a short-term pullback in the equity markets. For those rare birthday party attendees who are called long-term investors, opportunities still remain despite the large run in equities. The cake has been sweet so far, but if you are patient, some ice cream and a gift bag may be coming your way as well.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including emerging market, international, and bond/treasury ETFs), but at the time of publishing SCM had no direct position in VXX, MXY, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.