U.S. Stocks Fall, Powell Speaks, and a Regime Change in Equities?
Investors opening their finance apps on their smartphones or flipping the TV to CNBC this morning, February 23rd, likely experienced an uneasy feeling in their stomach. What they saw: red numbers, and lots of them. U.S. markets opened in a glorified free-fall, with the tech-heavy NASDAQ leading declines, down almost 4% at its worst. Small-cap stocks, proxied by the Russell 2000 index, shed 3.6% at its worst, and the S&P 500 was down 1.8% about twenty minutes after the market open. The 10-year Treasury yield peaked at 1.389% around the same time.
This left little time for investors to react or even catch their breath. However, in a moment of timing made for Hollywood, Fed Chair Jerome Powell quickly stepped in to reassure everyone the Fed is still there to catch the bottom. Powell’s testimony to the Senate Banking Committee Tuesday morning reiterated the Fed’s dovish tone – no rate hikes and continued asset purchases. Just like that, markets began to rebound. Powell’s message that it will “take some time still” to see progress in unemployment and inflation resonated with investors. The stimulus trade is not yet dead. At the time of this writing, markets are again beginning to fall in the same fashion as outlined above.
However, a market shift that patient investors have been waiting for may be finding footing. Take a look at selected index performance year-to-date through 2/22 compared to 2020 as a whole:
2020 was led whole-heartedly by large-cap growth stocks as traditional investors around the world warned time after time that these prices are too rich, only to be drowned out by yet more advancements in the prices of growth companies.
REITs, Value stocks, international stocks, among others showed little-to-no reward for their diversification benefits in 2020. Value underperformed growth by a whopping 35% and non-U.S. stocks underperformed U.S. stocks by nearly 8%. Investors who stayed disciplined in holding a diverse portfolio may now finally be reaping those rewards. A mere seven weeks and change into 2021, Value is now outperforming Growth by nearly 5%, international stocks are outperforming U.S. stocks by a healthy 230 basis points with emerging markets outpacing U.S. stocks by nearly 5%. All of this only seven weeks into the year. With economies set to re-open and economic growth to resume, remember this: when growth is scant, investors will flock to it; when growth plentiful, investors need not reach for it. In other words, as the world begins to get back to a new normal, look for fundamentals to matter again and for excessive growth to be only an option and not a requirement. Investors may indeed look outside the U.S. to bolster portfolios – this has paid off in the past:
Source: Hartford Funds
We have likely learned (again) this time is indeed NOT different. Markets run in cycles and although stocks can remain overvalued for long periods of time, the run does indeed end. If you are left with a portfolio full of trend-chasers without a diverse backstop, you are likely to feel the pain eventually. Furthermore, trying to time that reversal is a near-impossible feat.
This is not a call to action to dump any Tech stocks or U.S. stocks you own. With additional fiscal stimulus still likely, continued monetary dovishness, and U.S. GDP growth set to accelerate in the coming months, this is simply a message to be diversified and stay invested. This does not mean the Tesla, Amazon, Apple stocks of the world will lose everything. There is significant data, though, to suggest they may not perform in-line with their recent past and you simply do not know when these shifts will happen. Exeter portfolios are diversified across styles, sizes, and geographies for these exact moments.
You have undoubtedly seen a similar chart, but it is worth reiterating the shortfall you experience by trying to time the market.