Timing Trend Reversals

The title of my weekly note for TSA Wealth Management has been changed to ‘Wealth of Optimism’ and the blog has been moved to www.Swanburg.com. Our goal is to improve the reading experience by leveraging the tools available through Substack while also allowing for more personality in the writing. Other than that, everything else will be the same.  Enjoy!

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When making predictions for the year ahead, it is always tempting to believe that the investment trends of the previous twelve months are ready to reverse. For example, in this article from the end of 2023, Morningstar’s chief US market strategist used a lot of analysis to make the case that growth was too expensive and value and small cap were ready to outperform in 2024. 

Unfortunately for investors that acted on that advice, the expected returns haven’t materialized.  As pictured in this chart, through May, growth stocks in the S&P 500 continued to outperform their value counterparts by 9%.  The Magnificent 7 stocks (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia and Tesla) collectively outperformed an equally weighted S&P 500 index by 20%. In other words, value stocks and smaller companies have underperformed.   

Source: Blackrock

More importantly, this continued outperformance has been justified. The prices of growth stocks have continued to go up because their earnings have continued to exceed expectations. 

Source: Blackrock

Stein’s Law states, “If something cannot go on forever, it will stop.” And this is true for the outperformance of growth stocks.  They cannot outperform forever, and the trends will eventually reverse.  The Morningstar strategist’s general idea that value and small cap companies will outperform large growth companies will eventually be true. However, timing is everything and as investors that followed his advice can tell you, the pain of being early is often indistinguishable from the pain of being wrong.