A Friday rally maintained the effusive start to the year for stocks. A strong jobs report indicated the economy remains strong while inflation cordially hovers low enough for the Fed to stay “patient” with interest rates. Apple’s earnings delighted investors despite a slowdown in phone sales, while Google disappointed. S&P 500 earnings overall are still set to decline modestly year over year, but are ahead of expectations from the start of the quarter. A trade deal with China was said to be possible as soon as the next week or two, but both sides issued caution than complications remain and a final deal may be less comprehensive than many expect.
S&P 500: 2,946 (+0.2%)
FTSE All-World ex-US (VEU): (+0.6%)
US 10 Year Treasury Yield: 2.53% (-0.01)
Gold: $1,279 (-0.5%)
EUR/USD: $1.120 (+0.4%)
- Tuesday – Google parent Alphabet’s shares declined after reporting revenue growth in advertising slowed to less than 20%.
- Tuesday – Venezuelan opposition leader Juan Guaido attempted a failed coup. The US accused Russia of convincing current President Nicolas Maduro to stay.
- Tuesday – Congressional Democrats and President Trump agreed on a two trillion dollar infrastructure package, but it is not expected to be agreed to by the Senate.
- Wednesday – The Fed held short term interest rates steady and indicated it considered recent low inflation numbers as transitory, disappointing some hoping for a rate cut soon.
- Thursday – US crude oil dropped nearly 3% to $61.81 after data showed stockpiles surged.
- Thursday – Nancy Pelosi accused Attorney General William Barr of lying to congress, escalating political tensions.
- Friday – The US added more jobs than expected in March and official unemployment fell to 3.6%, the lowest since 1969. Wage inflation remained muted.
Driven by the five most valuable companies in the US (Microsoft, Apple, Amazon, Alphabet and Facebook), growth stocks are again handily outpacing value stocks for the year. Over the past five years, growth (VUG) is up 13.2% annualized while value (VTV) came in at 9.9% annualized.
Anything near 10% per year is of course a great compounding return to have, but it is only natural that many investors have grown envious of the higher numbers posted by the tech-driven growth part of the market.
Of course, ten years ago the common wisdom suggested that one should favor value because of its long, long history of outperformance over growth. What is an investor to do? One can go with what is hot – after all it “feels” like companies like Amazon and Apple can only keep getting bigger. Or one can go with the nearly 100 year track record of value, hoping that the emergence of smart phones, cloud storage and AI haven’t changed the world enough to swing the tide.
Our approach is to maintain a relatively equal weight to both and rebalance periodically by selling a little bit of whichever has done better lately. The bummer of this is that in the short term we will never beat whatever part of the market is doing best. But as long as there are cycles, due to the math of rebalancing, we expect to finish much closer to the long-term leader while removing the risk of being totally wrong.
In our view it is a no-brainer – but only for those with patience and with faith that there will continue to be style-driven cycles. In this, we have high confidence. The world will evolve, but as long as there are free markets, investors will always eventually get too excited about what is making money and too dour on what is not.