Content provided by Rusty Vanneman, CFA, CLS Chief Investment Officer
The current stock market environment feels a heckuva lot like the late 1990s. Large-cap growth stocks, particularly some high-profile Internet companies, are leading the way now, just as they did then. Value-oriented investors, including some of the most well-known portfolio managers, are getting shellacked. The international markets are also trailing the U.S. market by large margins. Overall, the current environment is very similar to what we witnessed more than 15 years ago when globally diversified portfolios trailed the S&P 500. Let’s look at what happened then – and what we should be prepared for now?
First, the numbers, as of November 16, 2015 (all numbers from Morningstar):
- U.S. large cap growth stocks are leading all U.S style boxes – by a lot.
- Over the last year: Large-cap growth has dominated other style boxes. It is up nearly 9%, crushing the second place style box at just over 2%.
- Last three years: Large-cap growth is up 20% a year, again in a commanding lead over the next best style box.
- Last five years: Large-cap growth is up just over 16% a year, the best performance of any U.S. style box.
At CLS, we have been overweighting large-cap growth stocks for some time now, particularly through our high-quality investment theme. This positioning has helped us considerably.
So, if this is like the late 1990s, what can we expect moving forward?
- Growth could continue to outperform in the near-term. In fact, we think it still can. Not only is momentum on its side, but we believe relative valuations still support this positioning. While large caps compared to small caps aren’t as cheap as they once were, and neither is growth compared to value, it’s still a net lean towards large cap growth – at least for now.
- But this performance will eventually reverse – and it will likely be with a vengeance. Look at the late ‘90s experience. Growth peaked in early 2000, and within a few years all of the outperformance of growth versus value – and then some – was lost. It pays to be vigilant.
Next, let’s look at the outperformance of domestic stocks versus international.
- The U.S. stock market is simply crushing international.
- The U.S. market has an annualized five-year return of 14%. This compares to MSCI EAFE’s five-year annualized return of 4%. MSCI Emerging Markets (EM), meanwhile, has lost nearly 6% a year.
- Over the last three years, the U.S. is up 17%, EAFE is up 8%, and EM is down 6%.
- The U.S. is up 2% over the last year, while the EAFE is down almost 3% and EM is down 18%.
At CLS, we have also been overweighting international stocks for some time. This positioning has not helped us – yet.
So, what can we expect moving forward?
- Domestic could still outperform in the near-term. It has momentum on its side. But, it does not have relative valuations supporting its positioning. In fact, relative valuations strongly support international – so much so that expected returns for international over domestic is over 7% per year according to our proprietary CLS score.
- Also, this performance will eventually reverse – again, with a vengeance. After the 1990s, domestic markets peaked in mid-2000, and within a few years all of the outperformance of domestic versus international was lost.
Note: Jackson Lee, CLS Investment Research Analyst, did some serious number-crunching on this article.