Well, I can say this about 2018: It’s been interesting!
Just two days ago, the Dow shot up over 600 points, making it one of the best single-day performances in years.
The cause? Fed Chairman Jerome Powell made some uncharacteristically dovish comments that suggested he might not be raising rates as aggressively next year. That’s all it took.
Now, I’m the first to admit that I don’t know whether or not the market correction is officially over. Not all corrections result in major drawdowns. In many cases, the market just grinds sideways for a year or two before resuming its uptrend. That was the case for most of 2015 and 2016, and, while 2018 has had larger swings, that’s been the case this year as well.
But I do know this: Massive moves higher like we saw on Wednesday are a lot more common in bear markets than bull markets.
As my friend J.C. Parets, editor of free e-letter Big Market Trends (sign up here), recently wrote,
If you look at the top 10 biggest rallies, percentage-wise, in the Dow Jones Industrial Average before 1950, they all took place in the following years: 1929, 1931, 1932 & 1933.These years represent some of the worst bear markets of all time.
Moving into more recent periods, we want to find the top 10 best days since 1950. They all took place in 1987, 2002, 2008 & 2009. Again, these are some of the worst times to buy stocks in our lifetime.
So, we may or may not be out of the woods. Only time will tell.
But as you position your portfolios for 2019, I recommend you strongly consider replacing some of the go-go growth names that have dominated since 2009 with some value names.
It’s no secret that value investing works. Countless studies (and real-world practitioners) have proven that a strategy of buying cheap stocks beats the market over time.
The investment firm Dimensional Fund Advisors recently ran the numbers for the 90-year stretch of 1926 to 2016 and found that a disciplined large-cap value portfolio outperformed the S&P 500 by over 2% per year.
That 2% might not sound like much. But compounded over the length of the study, it made a huge difference. A dollar invested in the S&P 500 in 1926 would have grown to a little over $6,000 by 2016. That same dollar invested in the large-cap value portfolio would have grown to over $13,000.
The problem with value investing is that it doesn’t outperform every year… or even every decade. There are long stretches where value gets its butt kicked.
Take a look at the chart below.
This divides the value of the Russell 1000 Value Index by the Russell 100 Growth Index.
When the line is rising, value stocks are outperforming growth stocks. When the line is falling, value stocks are underperforming growth stocks.
As you can see, leadership flipflops. There are long stretches were growth beats the pants off value, as it has since 2007, and long stretches were value beats growth.
Let’s take a walk through time. Value outperformed throughout the early to mid-1980s, though growth dominated in the late 1980s. Value enjoyed a nice comeback in the early 1990s… though when the dot-com boom really got underway in the mid-1990s, growth left value in the dust for several years.
Value enjoyed a massive run of outperformance from 2000 to 2007. These were some of the very best years in the careers of long-time value investors like Warren Buffett.
But since the early days of the meltdown, growth has utterly crushed value.
As history has shown, this outperformance wont’ last forever. It will turn. And I believe the next five to 10 years could look a lot like the 2000 to 2007 period.
That’s bad news if you’re betting heavily on social media stocks. But it’s fantastic news if you’re a value or income investor like me.