Major Correction In Glamour Assets-Big Opportunities With Options

2020 was a truly unique year from a stock market perspective in that the most expensive stocks got more expensive, while the cheapest stocks got cheaper. All of this was in spite of the year starting with the spread between value and growth already at near-record levels, with many astute investors betting on mean reversion. Of course, the reason for the extreme outperformance of growth stocks in 2020 were the lockdowns and the stay-at-home orders, which greatly benefited information technology and software companies, to the detriment of many more traditional industries. It wasn’t only Tech that benefited though, as real estate also had a major boom spurred on by low-interest rates and Millennials’ desire for more spacious living accommodations.

Unsurprisingly 2020 was the worst year for value investing in history from a relative performance standpoint. Short-term performance chasing naturally caused many market participants to make the fatal error of strategy shift, chasing what had worked so well recently, which was growth stocks outperforming, and abandoning value just when it was cheapest. Every type of strategy goes in and out of favor, but short-term performance chasing usually leads to very negative consequences. Cathie Wood of Ark Investments became famous last year with her timely growth investments, but she too has seen her fund decline by nearly 35% from its recent highs. Because most investors got in after the major gains she experienced last year, the actual returns on real money are not very good, despite being phenomenal for the investors that got in early.

As we’ve seen the economy reopen gradually, value stocks are back in vogue and are outperforming nicely. The spread is still very wide, so we’ll see how long this lasts, but if history is a guide, it could be 5-7 years easily. As the graph shows above, the correlation between value and growth stocks are near historic lows, which is an example of the gap between relative valuations closing a bit. We saw the same phenomenon in 2000 when growth stocks tanked for several years, but value stocks not only outperformed but were wildly profitable from 2000-2007.

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