How has the market done this year?

An easy question one would think. And often, it is quite easy, but not this year. Below is a table of different market indices with performance up to but not including the big dive in the market last Thursday.

The second index from the top with the yellow dot to the left is what most people think of as “the market” – it is the S&P 500. It is the 500 largest stocks in the market, but it is important to know that this index is capitalization weighted; meaning the largest stocks have a higher impact on performance, and this impact has been very large. The index below with the blue dot to the left is the S&P 500 Equal Weight meaning all stocks have the same 1/500th weighting. It is flat for the year!

Many people watch the popular Dow Jones Index. It is made of very large companies that often have more of an industrial weighting than the S&P 500. It is only up a little over 3%, while the S&P 500 Value index below it (red dot) is down almost -8%. This index simply owns the 250 stocks in the S&P 500 with lower than average P/E ratios, i.e. it buys the cheapest half of the S&P. It does not own the more expensive stocks. Sounds like a good idea, right? Not this year! Even worse is the S&P Small Cap index which is down -9%. Usually when the overall market is up the riskier Small Cap stocks outperform, but not this year.

All of these returns are significantly behind the S&P 500 Growth index which is up a stunning 29% this year. This is an unprecedented event. We went back over the last 21 years, and Value won 11 of those years and Growth won 10 years. This is typical of very long-term time frames – Value has a small edge but over time their differences are small. Over the last 21 years the difference between Value and Growth have been +/- 10% 18 times. This year Growth has beat Value by 37%. This sounds awfully familiar to the Dot Com bubble leading up to the spring of 2000. After the Dot Com bubble popped, Value beat Growth by 23%.

Our point here, is that how you are invested this year has greatly affected returns. Also, how you handled the plunge and subsequent rally in the market has significantly impacted returns. The opportunity to make big mistakes has never been greater. Our stocks tend to be reasonably priced value stocks and they will not outperform in a Growth driven market. It is for this reason we own a large overweight in the Cap weighted S&P 500 and we also purchased the Growth oriented ETF’s MTUM and QQQ. These actions have kept us ahead of our policy benchmark so far this year.

Recently, we have been reducing (but not eliminating) our overweight in these Growth areas in favor of Value, International and Small and Midcap. The lesson from 2000 is that while it is tempting to hope that the stunning outperformance in Growth continues, often the markets revert to the mean.