Comfortably Numb
Stocks have been hit pretty hard in 2022… But you’re probably still okay if you have a sound strategy.
The three major US stock market indices have seen big drops, with the tech-heavy, growth-oriented Nasdaq taking the biggest hit at nearly 30% down for the year and the more blue-chip, value-based Dow Jones Industrial Average down just 7.44%. As a more diversified, core US market index, the S&P 500 falls squarely in the middle at a 17% loss.
However, each has rebounded from it’s yearly low. See below:
When you consider why some stocks fall more than others in this environment, don’t overcomplicate your analysis too much. Sometimes it’s as simple as this:
Higher interest rates means debt has gotten more expensive (just ask anyone applying for a mortgage today vs. a year ago, or the crazy high interest rates on credit cards).
Profitable companies can lean on those profits to pay bills or fund growth, less profitable companies may have to deploy this expensive debt to do the same. In the face of this, investors may flee some companies more than others.
More than a decade of low interest rates had some companies believing they could further delay turning their business into a reliable profit generating machine, and instead keep borrowing. Those are the companies who’ve been hit the hardest in this environment.
The Bright Side: This should make some sense.
When we create a set of investment beliefs we need to have an opinion about what is going to be the best way to invest, and when considering growth oriented (like the Nasdaq) and value oriented (like the DJIA) segments of the stock market, we like to review how these factors (growth or value) have fared in the past.
See the comparison below:
Source: Dimensional. Past performance not indicative of future results.
The above chart tracks the relationship between value and growth investing dating back to 1926, showing the average outperformance of value stocks over growth stocks at 4.1% per year.
But averages are, you know, averages. Consider Alaska:
Denali (Mt. McKinley) is the highest peak in North America at 20,310 above sea level. This skews Alaska’s average elevation above sea level to 580 feet across the whole state, which is about the same elevation as the city of Nashville. In reality, if you’re in Alaska you’re spending a lot more time slushing around near the ocean or trekking on a high tundra or climbing a mountain. There’s not much of the state that’s actually at 580 feet above sea level. When we look at average performance for investing, we’re a little like Alaska in this way — extremely variable.
Frankly, if you look at the last decade of the chart above there’s a lot more blue bars than green ones, and it got a little hard to remain committed to the idea that companies with strong balance sheets and attractive earnings relative to their stock price would perform well — this all culminated in 2020 when growth stocks rallied nearly 38% while value stocks were slightly negative (that’s what happens when the government drops ‘helicopter money’ on the economy; even the worst businesses see their stock prices go up). What’s happened in 2021 and 2022 was bound to happen at some point, we just didn’t know when. The recent wild swings to bring us closer to a long term average should seem, dare I say, normal.
This brings me to the main point of this piece: nothing always works.
That’s right, nothing.
I launched Harding Wealth in 2016 with a pretty thorough understanding of the long term relationship between Value and Growth. Then value stocks continued to lag growth stocks in 2017, 2018, 2019, and 2020 before value came back in 2021 and outperforming thus far in 2022. This is why you don’t go all-in on the Nasdaq or the Dow or value stocks or growth. We can know history and use it to make informed decisions, but new stuff that’s never happened before happens all of the time. 2020 was the biggest outperformance ever for growth over value, 2022 is the worst year ever for the bond market, who knows what 2023 and beyond have in store for us. We’ll continue to learn more and adapt.
Because of this, my advice is relatively simple:
1) Adopt a strategy you like and believe in. I like using the weighty evidence of history as a guide, but you do what makes sense for you.
2) Know that you won’t always be in the best performing thing. This would require a lot of regular switching between investments and you’re probably not going to consistently switch at the perfect time.
3) Let your conviction in what you’re doing to allow you to become comfortably numb to the day-to-day or even year-to-year movements in your portfolio.
That’s all for now. If you want to dig into this value vs. growth discussion further, just let me know and I’ll send you some more information and we can chat about it.
One more thing:
This morning I played Pink Floyd for my son, Clayton, for the first time while driving him to school. As David Gilmour uncorks the second guitar lead in Comfortably Numb (at about 4:35 into this video) he says, “Hey Dad, I like this song”….. Life is good.
That’s all for now.
Adam Harding | CFP | Advisor @ Harding Wealth | Amateur Guitarist
www.hardingwealth.com
Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.
Data Disclosure for Value vs. Growth:
Yearly premiums are calculated as the difference in one-year returns between the two indices described.
Value minus growth: Fama/French US Value Research Index minus the Fama/French US Growth Research Index. Fama/French US Value Research Index: Provided by Fama/French from CRSP securities data. Includes the lower 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq equivalents since 1973). Fama/French US Growth Research Index: Provided by Fama/French from CRSP securities data. Includes the higher 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq equivalents since 1973).
The Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Results shown during periods prior to each index’s index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.
