Good Times, Bad Times

In an extended series of articles beginning in the fall of 2019 published here on Valuewalk and on www.cornell-capital.com, I reiterated the theme that it was a very difficult time for investors.  These articles included pieces such as Why This is Such a Hard Time for Investors, Why Warren Buffett is Sitting on $128 Billion in Cash?, The Big Market Delusion, The Apple Multiple Expansion, and Is Tesla a Tech Stock.

The thrust of all these articles was the same and is best summarized by what I wrote at year end 2019, “In the forty years that I have been studying and participating in investment markets, the current conditions are among the most challenging.  That may sound odd – interest rates are low, credit spreads are tight, stock prices are near records, real estate has recovered from the great crash to reach new highs.  But those are exactly the problems.  What matters to investors is how their investments will perform in the future, not how they have done in the past.  And going forward all the past good news are the reasons that times are so perilous today.  Prices have been pushed to historic levels . .  . There is a reason that Warren Buffett is sitting on $128 billion in cash.”

At the time I wrote the article, I suggested that investors in U.S. equity markets should focus on value stocks and consider hedging their position with options.  Looking back now, how did that strategy work?  The good news is that it beat the market by any reasonable measure.  The bad news is it was still down a lot for two primary reasons.  First, value stocks were no more immune to the Covad-19 collapse than their more glamorous cohorts.  Second, the market dropped so quickly and so far that the value of all the options fell to essentially zero and offered no added protection from that point forward.

Russell 1000 Growth vs Value Index

As an illustration of the first point, the first graph below plots the percentage drop from the beginning of 2020 in the Russell 1000 Growth Index and the Russell 1000 Value Index.  The graph shows that the value index actually dropped more, down 32.0%% as of the close of March 18, compared to the growth index which was down only 27.5%.  This despite the fact that in 2019 the growth stocks had run up much more sharply than the value stocks, many of which did not rise at all.

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