Transcript:
Hello, everybody, welcome to Wednesday, the S&P 500 was up .15%. And I want to answer a question today, that’s been coming in a few times, which is just, you know, hey, the indexes up, but my accounts not up. And so some explanations for how the relationship between kind of a diversified portfolio and some of these indexes are, I’m going to use what’s called the nine boxes to explain how this works, and then also show you in within those, you know what, what that means in terms of the battle between growth and value, you should be able to, so let me share my screen. And so the nine boxes is something that I get from Morningstar here. This shows the last three years kind of color coded here. And some explain what this is, but large, medium and small companies.
So the size of a company is what’s called the market capitalization. And you just figure out that by adding the, you know, multiplying the number of shares, times the price per share. So big company like Apple’s down here, and a smaller companies obviously, down here, and then there’s value, okay, these are companies that are considered relatively inexpensive, compared to their earnings. And then growth, these are more expensive compared to their earnings, but they’re growing quickly. And then core is just in between those two. And so if you look here, over the last three years, you’ll see that large growth and mid cap growth have been the big winners. And so if you go by the S&P 500, or let’s say, the Vanguard Total Stock Market index, and the Total Stock Market index, you’re going to basically buy everything that’s in here, but you’re gonna get most of your rate of return out of these two boxes. Because most indexes, including those are what’s called market cap weighted, what that means is that the bigger companies have more impact on the index. And the smaller companies have a lot less over the last three years, either been very well paid off to just have the broad market index as far as that goes.
But things changed with the, with the virus. And so we look here, just at the one year, you can see that the big gains all came out of the small stocks, because over the last 12 months, the big winners have been, of course, innovative technology and clean energy and genomics and immunotherapy, you know, the advanced healthcare. And that’s all down here. And a lot of this was being driven by the individual investor that was coming in from you know, the RobinHood’s and what have you. And now, in the last three months, things have changed quite a bit. And you can see here that the growth side, for example, which has been the long term winner is not the big winner is the value side so far this year. And so there’s a couple of reasons for that. Number one, that growth side got very expensive with the whole run up, especially down here in the small growth area. But also the growth doesn’t do as well when inflation comes up. So as the interest rates on bonds continue to come up, it makes growth worth, you know, underperformed and value generally does better, right now value also has another component going for it in that most of the stocks that are affected in you know, adversely by the virus are in this column here as far as that goes. And so you can see, you know, right now, so far this year, again, small value has been at been the big winner. And we have big, you know, motion in that area. Now, if you look at the last week, here we are, growth has done better.
And again, interest rates have moved back. And so people are moving back towards growth. I think that’s a mistake, I think that what’s going to be happening here, you know, coming forward for this year, a lot of what’s happening right now, that’s kind of creating this lower inflation environment, you know, at least what looks like that is because they’re having trouble in Europe. So once that gets kind of ironed out, and they get the vaccine out in Europe, you know, the entire globe starts to open up, we’re gonna see shortage of supply, and we’re going to see an interest rate that moves up, which is going to drive money away from, you know, the growth side, like we saw so far for parts of this year, and towards the value side. So normally, very, very happy to have most of the money in a broad market component, and then maybe have some targeted indexes. And that’s what I think we’re going to get back to here shortly. But if we look at what is happening for this year, and what I think is going to happen for the rest of this year, we’re going to see explosive growth here, and probably some real underperformance on the growth side. And so buying these broad market indexes going forward for maybe for the rest of this year, the next six to 12 months, whatever that might be. I think you’re going to really underperform what what you could do in terms of the markets. Eventually it all evens out. And we get done with the reopening these these run as far as they’re going to run on the value side. And then you know we get back to kind of the normal the broad market piece.
In such two so that’s that’s what I see happening right now. It’s really fascinating to watch this battle go on. I know that it’s been difficult to watch, you know, the value side underperform here for the last few weeks. But I’m just temporary telling you once this stuff starts to really roll together, I think here’s a great analogy.
So I had a boss who was from Connecticut, and he used to take me back, you know, to visit his parents once a while and his brother would take me out fishing in Long Island Sound, they fish for what’s called a Blue Fish, the Blue Fish feed in this frenzy so they’re BOOM! They come in and you have your bait fish and you throw it in the middle of his frenzy and you catch a Blue Fish. That’s last year. That’s exactly what’s happening. It didn’t matter how high that was, you know, you could buy a clean energy that already had a huge run, you’re still gonna make more money because against a frenzy, all these individual investors coming in BOOM BOOM BOOM. Now it’s completely different situation. It’s more like fishing off the shore and you have your bait out and you’re just waiting for the fish to combine. So we’re waiting for this value fish to come by. And it’s gonna be I hope a big one and we’ll be able to, you know, catch it just a different strategy.
You have to be able to adapt your strategies. I think right now if you go broad market, you’re going to get hurt by the fact that the growth could underperform. If you go to pure growth. Obviously, you’re going to get hurt if growth underperforms growth underperforms and higher interest rate environments, I don’t see a way where we’re not going to have a higher interest rate environment right now, the Federal Reserve Notes came out today. And again, they’re reiterating you know, the fact that they’re not planning on raising rates in this temporary inflationary environment, which means that that’s going to be bad for growth stocks, and better for value stocks. So that’s where, you know, if you’re gonna fish, you know, you got to have the right bait, you got to be patient, and we got to kind of wait, the feeding frenzy, the average individual investor has kind of disappeared, the volume on RobinHood for examples dropped 35%, just in the last five weeks. So, you know, we’re starting to see you know, they’re losing money on that growth side and just going off and probably doing some other things at this point in time. So now we’re dealing with the professional money managers who are left, and they’re the ones that are going to be driving this value think they are looking at earnings versus you know, expectations or what have you. So, I think that’s, you know, we’re still sitting there or just waiting, I’m getting, you know, they’ll take some patience before we get there. But it’s, I feel pretty good about what might happen here. I look forward to talking to you tomorrow.
And again, you know, we do have to go live with Tom on Friday. All you do is put that right in golivewithtom.com into your browser, hit hit enter and you’ll be right on our YouTube channel at 12:15 you know, Pacific Time to 1:00 so you can think of your questions or cover some different things really should be fun. Look forward to talking to you tomorrow. Thank you.