The four most dangerous words in investing are: 'this time it's different. - Sir John Templeton
I am frequently asked what I think of current financial markets. That's a loaded question - including an implicit request for insight on what to expect from here. I try to acknowledge when asked that I have NO special insights on what will happen to markets in the coming days, months or even the next couple of years. Why? Because stocks are long-term assets that respond (sometimes in unexpected ways) to geopolitical and financial events that I cannot begin to predict. The longer the time horizon, the greater the accuracy on expectations for future returns.
However, just because I am not willing to make predictions on the near term does not mean I cannot weigh in on what I see as a very narrow market move over the last 10 years and in particular the last 5 years. What do I mean by "narrow"? It means that just because what you hear on the nightly news has gone up a lot - not everything else has. For example:
Annualized Returns
5 Yr 10 Yr
S&P 500 10.7% 13.6%
US Small Companies 6.4% 12.6%
US Small Value 4.8% 11.5%
International Value 2.4% 4.1%
Emerging Markets 2.8% 4.3%
From this you can clearly see that in the last 5 years in particular - the returns announced on the nightly news (S&P 500) are significantly greater than returns of the broader markets. Additional research shows that most of this excess performance were driven by just a few stocks. Facebook, Amazon, Apple, Netflix, Google and Microsoft now account for over 18 percent of the S&P 500 - up from less than 8 percent just six years ago.
So, what does this mean for you? The huge, "narrow" move of very large tech stocks in the last 5 years means that they are priced for perfection - but is not an indication of broad market valuation. U.S. Small Cap value (the highest performing asset class historically) has been left behind as have international and emerging markets. I'd suggest that these assets are less expensive and currently not appreciated - which positions them for future price appreciation, whenever that may be...
