Alpha Power Investing Newsletter

August 3, 2020

A Glimpse of the Future (?)

There is an old adage that states that "nothing ever stays the same." In some cases, we wish it would. When a trend develops in the financial markets, we typically prefer that it last for a long time and thus give us an opportunity to profit. But sometimes this happens and sometimes it doesn't. When it does not, often investors find themselves scrambling to get on board with a new trend as quickly as possible after the old trend ends. On the flip side, sometimes a strong trend develops and persists. Ironically, the longer a trend persists the more investors become complacent and take the trend for granted (for a recent example, think FANG stocks versus just about anything else), mistakenly lulled into a false sense of security that the trend will last forever. But it never does. The bottom line is simple: change is constant.

A closer analysis reveals that the markets are extremely cyclical in nature. As with anything in the markets, timing the turning points in the relationship between two investment avenues or asset classes is extremely difficult. Fortunately, by tracking the relationship between asset classes an investor can see: a) when a trend has reached an extreme level (and therefore is ripe for a reversal which will surprise the majority of investors); and b) when a reversal of trend actually appears to have formed. And the results of paying attention to such trends can be very beneficial.

In recent years certain trends have become dominant. Companies that fall into one or more of the following categories - large-cap, technology-related, growth or momentum - have overshadowed all other stocks and investment categories. No one can say for sure how long these trends will last (and no inference is being made that a major change is imminent) but the one thing history tells us is that eventually they WILL change. Yet with each passing day more and more investors become accustomed and resigned to "the way things are right now." So, in an effort to keep investors aware of the need to focus on "the big picture", let's take a look at some trends that are likely to reverse in the decade ahead.

Each of the charts that follow display the performance of one asset class relative to the performance of another asset class.

  • A rising trend on the chart indicates that the first asset class is outperforming the second asset class.
  • The stronger the uptrend the greater the outperformance.

In most cases it is fairly obvious that: a) the current trend has been going on for some time; and b) the trend has accelerated recently. Again, this does not necessarily mean that these trends are ending and/or reversing anytime soon. But the thing to keep in mind is that no asset class leads forever. If and when the trends displayed in the following charts do in fact begin to reverse, there is good reason to believe that the reversals will be long-term in nature.

#1. Large-Cap versus Small-Cap
Figure 1 compares the performance of the S&P 500 Index to the Russell 2000 Index.

#2. NASDAQ 100 Index versus US Broad Market Index
Figure 2 compares the performance of the NASDAQ 100 Index to the S&P 1500 Index.

#3. Growth versus Value
Figure 3 compares the performance of the MSCI US Prime Market Growth Index to the MSCI US Prime Market Value Index.

#4. U.S. Stocks versus International Stocks
Figure 4 compares the performance of the S&P 1500 Index to the MSCI EAFE Index (an international index that tracks over 900 stocks from 21 countries).

There are a few other areas that may be ripe for change in the decade ahead. As you can see in the red box on the right-hand side of Figure 5, the rate of inflation (as measured by the 12-month change in the Consumer Price Index) has not really been an issue at all in the past 30 years.

The left-hand side of the chart suggests that this state of affairs will not last forever - and one can make a compelling argument that all of the money the Fed is printing at this very moment will eventually ignite a burst of inflation. Nevertheless, in recent years inflation hedges such as commodities and TIPS bonds (Treasury Inflation Protected Securities) have languished. Again, this state of affairs will likely not last forever.

#5. U.S. Stocks versus Commodities
Figure 6 compares the performance of the S&P 1500 Index to the Goldman Sachs Commodity Index.

#6. Long-Term Treasuries versus Treasury Inflation-Protected Securities (TIPS)
Figure 7 compares the performance of the Bloomberg Barclays Capital U.S. 20+ Year Treasury Bond Index to the Bloomberg Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index. (TIPS are treasury securities that can serve as a hedge against inflation as the underlying principal can be adjusted higher - thus increasing their value - based on increases in the Consumer Price Index.)

It should be understood that the information contained in the charts above is NOT intended to constitute a "call to action" per se for investors. It is more of a "call to pay attention." Some profound changes to the investment landscape are likely in the years directly ahead. The comparisons presented in the charts above offer investors a way to get some "early warning" regarding when those changes are beginning to take place.

One Last Piece of Food for Thought
For investors looking for a reliable, consistent "edge" in an ever-changing market, we continue to suggest a focus on the "Power Zone/Dead Zone" approach offered by Alpha Investment Management. The "Power Zone" is comprised of the months of November through May every year. Clearly this was NOT a great time for the stock market in 2020 as the COVID-19 pandemic drove the market sharply lower in February and March. Nevertheless, the S&P 500 Index held during November through May every year since 1949, showed a rolling 5-year gain in 61 of the completed 64 rolling 5-years periods, or 95.5% of the time (see Figure 8). We know of no other method with a comparable consistency of positive results.

"The more things change, the more they stay the same." Jean-Baptiste Alphonse Karr

Jay Kaeppel
Director of Research

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in the charts above do not represent actual trading and are not representative of the returns of any strategy. The illustrations are designed to quantify the effect of certain time periods on indexes as specified. Indexes are not investment vehicles and persons cannot invest directly in an index. Index funds and ETFs may vary somewhat from index returns due to management fees and portfolio structure. The data used to construct the illustrations were obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.

The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security. Before investing in any fund and/or strategy, investors should consider the investment objectives, risks, charges and expenses of the fund/strategy and its investment options.

Alpha Investment Management, Inc. is a SEC registered investment advisor located in the State of Ohio. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

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