Breadth Thrusts & Bread Crusts: Weird or Just Out of Context

JC Parets
March 24, 2022

From the desk of Willie Delwiche.

I had a chance to catch up with my friend Dave Keller this week. We talked about the overall market environment, touching specifically on market breadth and the implications of an accelerated tightening cycle by the Fed. You can check out a replay of the entire conversation here. 

At one point, Dave asked me about my perspective on one of the most important questions facing investors right now. It’s about labeling oneself as either a growth investor or a value investor, and how to operate within that framework in the current market environment.  

It’s important because it is pervasive. It’s important because it can be expensive. 

It’s important, but it’s also weird, leading investors to discount reality and operate within narratives. 

Without context, a lot of things can seem weird. Our expectations are framed by our experience. When reality is out of step with that framing, it’s easy to dismiss it as weird. That is a dilemma facing investors who only know one side of a cycle. 

Inflation had been trend lowering for years. But over the past 12 months, it has surged to levels not seen in four decades? 

That’s not something many of us have ever dealt with.

Global bond yields surging higher as central banks attempt to prove their inflation-fighting meddle? 

Unheard of for many, but it could be the new reality. It looks like we could see the U.S 10-year yield at 3% by year-end, and the German 10-year could soon be flirting with a 1-handle (a level not seen since 2014).

Commodities posting the best asset class returns in 2021 and following that with leadership again in 2022? 

Passive investors weren’t prepared for that from an asset allocation perspective.

Energy leading all sectors higher in 2021 and the only sector to be consistently positive in Q1 2022? Investors using their portfolios to signal virtue rather than generate returns are feeling pinched in unaccustomed ways.

Are these things weird? Or is it just that we haven’t experienced them recently, so they’ve slipped out of our collective consciousness. 

This brings us back to the growth vs value question. Too many investors buy into this dichotomy. While acknowledging that investors see the world this way, my answer was an encouragement to look at the world through a different lens. Rather than having a growth or value bias, investors would be better served by being style-agnostic and focusing on uptrends versus downtrends. Leaning toward opportunity and away from risk wherever it can be identified.   

This is a particular challenge for a generation of investors whose experience is limited to US large-cap tech stocks leading every rally and being bought first on every dip. That is just one leg of a cycle that stretches back in time. A new leg has emerged. The sooner investors adapt, the less financially expensive and emotionally draining it will be.  

What we are seeing now isn’t weird. But it may be a new-to-you reality that could take some getting used to. 

 

 

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