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How to keep stocks if you’re afraid of bubbles in the record market

The current bull market is defined by the fact that there is nothing against it. Threats come and go, but stocks continue to set new records. Some of the recent threats are rising interest rates, which could have a negative impact on equities, including the big tech companies that dominate the returns of the S & P 500. Also, some of the big companies in the market have warned that their stock prices are so high. There is a possibility of market correction.

But even among the brightest on the market, it’s not easy to defy the risk-on investment stance. “I think the road with the least resistance is still going on,” Mohammed Ellerian, Allianz Chief Economic Advisor, recently told CNBC. “The technology that underpins this market is powerful, but if you’re looking for warning signs, there are some warning signs coming out of the bond market.”

Selling this market hasn’t been the right move, at least for the last few years. After a 34% price drop in early 2020, the S & P 500 regained everything it had lost by August 18, hitting a high of 20 by the end of the year. On the other hand, it endured twice the annual average of 1% or more. Daily volatility, according to CFRA data.

However, reversion to the mean has a history of being ultimately right when it comes to equities, and there is a way to invest in high-value markets without giving up. An investment strategy that focuses on sectors and asset classes that have poor performance and potential. Add a form of stock market hedging without necessarily giving up on the winner. And there are currently some big gaps in pricing between winners and losers.

Traders work on the floor of the New York Stock Exchange.

Lucas Jackson | Reuters

Over the last three years, the S & P 500 has outperformed the international and emerging market indices developed by S & P. The last time these international markets surpassed the US large cap index was in 2017.

Small caps have been below the S & P 500 since the end of 2018.

The price growth gap between S & P 500 Growth and S & P 500 Value is the highest in the history of this August (dating back to the mid-1970s) and is now as wide as it was before December 1999, even after stock rotation. It has become. dotcom crashes.

“If you believe in reversion to the mean, it’s quite possible that it will be the year of reversion,” says Sam Stobal, CFRA’s chief investment strategist.

This is a large-cap stock that looks a bit “exhausted” compared to other stocks, as long as the fourth-quarter 2020 earnings season begins and it gains growth potential in the wake of a rise in stock prices in 2021. This is the message you will receive when you come.

The last red ink from the sharp loss of 2020 caused by the Covid-19 pandemic is finally on the books and the market moves past the ugly year, but the S & P 500 has potential for revenue growth, especially growth It looks like it’s extended to the stock portion of it compared to other market bets.

The S & P 500’s 12-month price-earnings ratio is a 45% premium over the 20-year average. CFRA pegs the 2021 revenue growth of the Index’s S & P 500 Growth Component to 13.3%, compared to 20.1% for its Value Group.

Equal weight and barbell

This analysis suggests that it may be time to do what many financial advisors recommend in US core market exposures. Consider moving from a market capitalization-weighted S & P 500, where profits are concentrated on growth, to an equivalent weighted S & P 500 index fund. ETFs such as Invesco S & P ETFs (RSPs). As a result, investors are worried about large caps (25%), which are currently concentrated in a small number of megatech stocks, and hedged in many of the non-executed value-oriented stocks and sectors within the index itself. It can take shape. It is expressed more.

“Last year’s losers aren’t overpriced and don’t experience a significant drop in pullbacks, which many believe the market is ready. The old saying is to ride the winner and shorten the loser. But losers can bounce back faster or better with corrections from overrated levels. “

But investors also need to look beyond the S & P 500 for earnings growth. Earnings for large caps are expected to grow by 20% this year, compared to 40% for mid-caps and 77% for small caps. Overseas, equity returns in developed countries are expected to grow by 40.8% and emerging markets by 36.6%.

The CFRA study also suggests that a so-called “barbell portfolio” strategy may be appropriate. You don’t have to sell the biggest winner on the S & P 500, but history says it would work if you also had the biggest loser last year and you can beat the entire market. Investors who have owned S & P’s worst sub-sectors in the last few years, or the stocks that represent those sectors, have generated growth beyond the market.

Since 1991, combining the 10 best S & P 500 subsectors with the 10 worst groups to create a barbell portfolio has a compound annual growth rate of 12.6%. The average revenue of the top 10 or bottom 10 sub-industries is above the market for all but three years (2008, 2011, 2018).

“It’s usually better to’get the winner’by building a portfolio of last year’s top 10 S & P 500 sub-industries. They showed a significantly higher average CAGR and frequency of price increases. But you have to worry about last year. The barbell portfolio has improved the ratio of returns to risk, resulting in higher returns than the market, as the best performers have risen too much and the excitement of enduring the 2020 delay has been dying to pass. There is a possibility that “Stovall wrote in a recent report.

It’s important to remember that when the market goes down, everything goes down. Investors cannot completely avoid market risk offshifts if they continue to invest.

“The ebb tide will drop all boats, but who will recover faster? We can see that the areas of valuation that have the most value, such as international, small cap, and value stocks, are blank. Something If you don’t like it, it’s time you need to own it. Everything. ” “If you’re not committed to one thing, it’s when you own everything.”

Focusing on the fear of repeating the dot-com bubble, Stovall also said that when the large caps went down in 2000, both medium and small caps went up. It was until 2002 that all three segments of the market were pulled down at the same time.

Thinking in terms of barbells, comparable weights S & P 500, and even value, small cap stocks, and international (all multi-year poor performers) is a way to implement a simple message about 2021’s investment strategy. “It’s time to increase diversification, and we’re not focusing on winning the growth of large cap stocks,” he said.

The S & P 500’s 2020 highest and lowest performing subsectors, and the stocks representing betting in these sectors, outperformed the entire index in the years that followed, based on the index’s history since 1991. ..

CFRA

How to keep stocks if you’re afraid of bubbles in the record market

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