November appears to be getting back to normal for the stock market now that we’re past the election tension. Volatility, measured by the VIX index, has been steadily falling back to the lows we saw in mid-August. And the S&P 5001 has slowly risen back to, and just beyond, the highs we reached in August – now up 14.3% YTD as of Thanksgiving Day (FastTrack data).
A big headline this week was the Dow Jones Industrial Average reaching 30,000 for the first time. While that sounds like a big milestone, that puts the index up 6.8% YTD (FastTrack data). It’s always funny to me how the financial news headlines focus on the Dow index. The only reason I can think of is that the numbers sound more dramatic than they actually are. A CNBC headline from Tuesday read “Dow pulls back more than 150 points after reaching 30,000 milestone.” Sounds dramatic, but 150 points is approximately 0.5% in movement, which is fairly common for any given day. Where’s that eye-roll emoji?
In the shorter-term, market cycles appear to be pushing on the overbought side and could be due for a pullback. Though at this point in the year, any market downside is expected to be short-lived and present potential buying opportunities. So that is how we’ll be viewing the cycles in our investment strategies.
What are we watching the closest right now? The potential for market strength to rotate into different segments from those that have been leading over the past few years. For example, we’re now seeing improvement in sectors like Financials, Energy and the price of Oil, and Value stocks. Technology and Communication should remain relevant as those seem to be the drivers of modern life, i.e., how we communicate, and how goods are purchased.
For the past 1000 trading days, which is approximately 4 years, Growth stocks have exponentially outperformed Value stocks. But this outperformance could shift back to Value in the coming years based on economic perceptions. What we believe this demonstrates is how important it is to focus on the areas of the market that are working and avoiding those that aren’t. A “properly diversified” portfolio (based on Modern Portfolio Theory), which many “buy and hold” investors own, has lagged over the past several years because of its belief that you needed to focus your investments on Value over Growth (the Red line over the Blue line) regardless of what the environment says. To me, that kind of “di-worse-ifciation” does little to reduce risk, and at the cost of lower returns. Wouldn’t you rather own more of the Blue line than the Red line below? You know what we’ve been favoring.
Bonds – the bond markets, specifically High Yield and Municipal bond indexes, had a good November: both are up around 3% for the month, while the Aggregate Bond Index AGG is up 0.9% for November (FastTrack Data). Like the stock market, we’re seeing a shift of confidence in where to allocate Bond money, which is something else we follow closely.
As I’m writing this on Thanksgiving Day, I’m thankful to you, for reading this article and taking an interest; for my fellow colleagues who inspire and challenge me; and for my family who supports and humor me throughout the year. Happy Thanksgiving, everyone!