Verschlimmbesserung (German) is an effort to make things better, which really ends up making things worse. No, I don’t know how to pronounce it.
For this month’s missive, we’re going to talk a little bit about what’s happening and not to be guided by what we’re hearing.
We’re hearing (especially in Missouri) about new mask mandates, the risk of the delta variant (although thankfully deaths and hospitalizations remain relatively low), increasing tensions with China (I thought these trade wars were easy to win?), and rising inflation.
Here’s what’s happening. The chart below of the Russell 2000 index (the de-facto proxy for the reopening of America) has gone sideways for the better part of six months after an amazing rally post-election (and post vaccine announcements).
While we have been outspoken “large-cap tech” buyers for the past several years, the spread between value and growth has now become stretched to a point where it would make some sense for technology to take a bit of a breather, while the underpinning of the American economy (small businesses) catches up a bit.
Just last week we saw an extreme in sentiment in relation to smaller businesses as shown by breadth (volume of stocks going up versus going down). On Monday, July 19th, we saw just 15% of stocks contributing to “up volume” on the NYSE, but on Tuesday, we saw that ratio come back in spectacular fashion with 85% of volume on the NYSE on the upside.
According to Jason Goepfert of SentimenTrader, since 1962, the S&P 500 has never showed a loss in the month following similar signals. These mostly occurred during momentum markets, and buyers followed through to avoid missing out on the next bull run. Our default expectation is that small cap companies will continue to rise as earnings season provides the proof in the pudding showing continued improvement.
So what does this mean for you? While most of this has already been done for existing clients, quarterly re-balancing should probably focus on small cap allocations to lead over the next few months (or VTWO with a lower expense ratio, thanks Sandy). Other than that, we still expect more bumps over the next few weeks, but our macro outlook for markets to be higher 6 months from now remains unchanged.
It’s still a relatively low volume part of the year (summer is always like this), so try not to get overly high or low based on short term movements. One of my favorite quotes came from a recent Google conference call. They said, “A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour.” Your overall investment outlook should be the same. Complexity is the language of the confused. Let’s see what the market brings and try and not make this harder than it already is.
– Adam