Investors tend to put past performance in the driver’s seat
By Dan Suzuki, CFA, Deputy Chief Investment Officer, Richard Bernstein Advisors
With corporate profit fundamentals continuing to deteriorate, it seems premature to position for the next bull market. But assuming the recent spike in volatility is signaling a change in market leadership is underway (as it historically has), then how should we start to think about strategic allocations for the next 5-10 years? Before answering that question, it is important to recognize the tendency of investors to invest in the rearview mirror. Regardless of the ubiquitous compliance warning that “past performance is not indicative of future returns,” investors tend to look at upward-sloping price charts and decide, “I’m missing out; I need some of that in my portfolio.”
King for a day
Empirically, it is the antithesis of this strategy that has historically worked. Tables 1 and 2 show the historical performance over five-year periods for (1) ten different equity categories and (2) US sectors. The best-performing segment of the equity markets during one five-year period was rarely the best-performing segment during any subsequent period. Even the top three market leaders rarely repeat among the top three in any subsequent period, and most often the top three for one period actually underperform in the subsequent period. There were exceptions, all of which turned into the most notable bubbles in recent history: Tech/Growth in the 1990s, Financials in the late-1990s and early-2000s and Energy/Emerging Markets in the 2000s.
What that means for the next bull market
At RBA, we will let the fundamentals be our ultimate guide, but as we think about what segments could lead the next bull market, it seems very unlikely that the dominant strategies of the prior bull market will maintain their leadership. That bodes poorly for US large cap growth stocks, especially given their leadership over the most recent back-to-back five-year periods. It is no coincidence that this conclusion is the complete opposite of what is currently considered “obvious,” particularly after the resilience that high growth Tech has experienced this year. But that is the point. Whether it was selling tech in 2000-2001 or selling emerging markets in 2009, the prudent strategy is often counter to what seems “obvious” at the time.
Dan Suzuki, CFA, Deputy Chief Investment Officer
Dan Suzuki is registered with Foreside Fund Services, LLC which is not affiliated with Richard Bernstein Advisors LLC or its affiliates. Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. RBA information may include statements concerning financial market trends and/or individual stocks, and are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. The investment strategy and broad themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information contained in the material has been obtained from sources believed to be reliable, but not guaranteed. You should note that the materials are provided “as is” without any express or implied warranties. Past performance is not a guarantee of future results. All investments involve a degree of risk, including the risk of loss. No part of RBA’s materials may be reproduced in any form, or referred to in any other publication, without express written permission from RBA. Links to appearances and articles by Richard Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investor’s investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an investment’s value. Investing is subject to market risks. Investors acknowledge and accept the potential loss of some or all of an investment’s value. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein.
newETFs.io respects the hard work of others and gives all credit to the remarkable folks at ETFTrends.com. This excerpt/article was pulled from their RSS feed; click here to view the original. Please note that on occasion, the RSS feed will not have the author. When this happens this site defaults the author to "News". Make no mistake, this excerpt/article was not created by newETFs.io, it was simply shared with you.