The pink chart below from last Friday’s Financial Times tells us a lot about where we are in markets now:
The indomitable FANG or FAANG stocks remain indomitable (that’s Facebook, Apple, Netflix, Google – plus Amazon if you do the double A). Though there was a brief moment of doubt earlier in the year, it passed in a twinkle, and since then, the tech mega-platforms have left the S&P 500’s total return of 2.7% in the dust. Amazon is up 45% year to date. Netflix has nearly doubled.
Next has been oil’s resurgence. While few talked about oil at the beginning of the year, now everyone does. In the second quarter, the S&P 500 energy sector topped info tech and returned 12.7%, its biggest quarterly gain since 2011.
Small caps are another notable winner -- presumably because the domestic focus of small companies means they’ll suffer less than large multinationals if a trade war breaks out.
Meanwhile, on the negative side, the strong dollar has punished emerging markets. Gold has failed to become a safe haven in spite of a perception of heightened risk. The Shanghai market is curiously weak. And wild Bitcoin? It’s down nearly 60%.
While not much is clear now, one thing that is is that buying momentum stocks still is working. Momentum investing – the practice of buying what is doing well and rising in price – is trouncing value investing – the practice of buying what is excessively cheap. Momentum also is trouncing the overall market too -- thanks largely to those aforementioned FAANGs.
Since the start of 2017, the S&P 500 Momentum Index has outperformed the broad index by 15%, a level of excess return not seen since early 2008. That kind of extreme outperformance suggests that momentum investing’s time will soon be coming to an end. After all, nothing can grow to the sky forever. Or can it?
We don’t think so. But value investing’s time has been a long time coming for a long time now, and it still hasn’t come. Momentum stocks, meanwhile, are up nearly 9% year-to-date.
So value investing’s time is either coming in a big way, or it’s not. Eventually, we’ll find out. And when we do, we’ll know what turned out to be the biggest mistake for value investors this period.
Will it be failing to understand that big technology platforms need to be valued differently than other companies? To be fair, Apple and Google have been viewed as value stocks at different times over the last half decade, but is it possible that value investors failed to recognize there are different rules for understanding the businesses and financial statements and valuation ratios of the real high fliers like Amazon?
Or will the big mistake turn out to be losing patience at precisely the wrong time? After all, the patience of value investors is being seriously tested, and the temptation to give up on value and give in to FAANGs seems to grow every day. What a shame it would be if it turns out that large numbers of investors do so at exactly the wrong time.