Market Declines and Great Expectations

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This recent decline in the financial markets—led once again by the collapse of very large and expensive growth stocks—is just the latest in a long string of challenges we’ve faced since 1993. All were anticipated by us (“predicted” is a too precise and potentially harmful word to use in this context), discussed in various productive ways in this newsletter, and dealt with in the same predictable (okay, now it’s appropriate) way by the Equius team. 

An investor who has been with us from the start has witnessed the following annualized returns from our go-to asset class proxies through May of this year (1995 is the first full year for all the value funds).

Declines such as the current one are always expected after long stretches of good market performance. The timing and degree of the declines, however, are unpredictable—the reason timing the market is such a destructive behavior. 

Anticipating (and communicating) the effect of political decisions, which affect US monetary policy (and, thus, inflation) and are typically short-term in nature, is something we avoid, however.

But inflation is now with us—thus the decline in bond prices. Our answer, as always, is to rebalance portfolios and look ahead to better economic conditions and asset class returns. In other words, this too shall pass.

In a recent article in the Wall Street Journal titled Value Investors Bet Recent Market Leadership Is Just the Start, the author states: Although few corners of the stock market have emerged unscathed in 2022’s dizzying selloff, value shares—traditionally considered those that trade at a low multiple of their book value, or net worth—have held up better than most. By one measure, they are on track to beat shares of fast-growing companies by the widest margin since 2001.

The article quotes Cliff Asness of AQR and Rob Arnott of Research Associates, two industry titans and consistent proponents of value investing.

Mr. Asness, managing and founding principal at AQR Capital Management, and Mr. Arnott, founder and chairman of Research Affiliates, say value stocks are still unusually cheap in comparison with growth, despite their recent run.

“People like me, both for legal and for honesty reasons, should never use the word guarantee, and I won’t,” Mr. Asness said in a recent interview. “But I’ve never been more excited about value.” Mr. Arnott, meanwhile, said value stocks might be in the early stages of a prolonged period of outperformance relative to growth.

“As we move closer to historic norms of relative valuation, I would reserve the right to moderate that view,” he said. “But from current levels, I think we’re going to have a stupendous decade and most particularly a stupendous three to five years.”

Great expectations we share as well. Time will tell. If you have doubts, your Equius advisor can help you review market and asset class history and realign expectations as appropriate.

In the meantime, we hope you enjoy the summer months with friends and loved ones without stress as the market works through just one more crazy cycle.

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2022 Equius Partners, Inc.

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