One of the most interesting aspects of investing comes from the continuously changing tides between types of investments over time. For years now, the largest growth companies like FAANG (Facebook, Apple, Amazon, Netflix and Google) have been dragging along the rest of the companies among the largest 500 in the United States. Meanwhile, the smaller-sized U.S. company and international stocks have lagged by a wide margin. Diversification has cost you money if you are more safely invested.
Also, fixed-income investments (bonds and other debt instruments) are incredibly overvalued at this time. Why? Primarily because, due to the Fed’s insistence that borrowers be benefited and savers/lenders be cursed, the more conservative crowd has chased a combination of perceived safety and the highest possible yields for income. Huge demand for anything raises the price for anything. Be on the watch for falling bond prices if we live long enough.
A battle usually rages behind the scenes between the two major styles of stocks too. These are growth and value. Those FAANG stocks are in the growth camp. Investors focus on high growth rates of sales and sometimes earnings. Value stocks generally trade at lower prices relative to their dividends, earnings or revenues. In the Russell 1000 Value index, Berkshire Hathaway, JPMorgan Chase, and ExxonMobil are the three largest members.
On Sept. 9, 2019, a day during which not too much noteworthy happened, the prevailing wind changed between growth and value stock performance. The iShares Russell 1000 Growth index fund (IWF) dropped by 0.78 percent while the iShares Russell 1000 Value fund (IWD) rose by 0.86 percent. That is a shift of 1.64 percent in one trading day!
Even after yesterday’s downdraft in stocks, the value components are pulling ahead of growth as judged by the rebounds to date from the two low points of August, both Aug. 5 for growth and Aug. 14 for value. IWD is now 2.9 percent ahead of IWF in less than six weeks.
What does this mean to you? If you are a buy-and-hold type of investor, it could mean better days ahead. If you are holding the big banks, telephones like AT&T and Verizon, consumer stocks like P&G or Johnson & Johnson, you may see your prices finally edging upward faster than the high flyers.
Since we observe and evaluate these kinds of differential advantages, it means we will be looking for better results and relative strength in industries and places it has not been seen for years. And since every family has several lawyers in it nowadays, try to steer your children and grandchildren toward finance if they are not planning to be doctors or health-care professionals, a group that may always be in short supply.
(Past performance is no guarantee of future results. Advice is general in nature and not intended for specific situations)
(Stocks and funds mentioned are not recommendations. Statistics from Worden Brothers, Inc., TC2000, 2019 and Morninstar, Inc.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at email@example.com.