The U.S. equity market in 2015 was a tale of two cities. There was a wide divergence of performance within the market, which is reminiscent of the late 1990s. In 1999, tech stocks (per the NASDAQ composite returns) rallied to gain approximately 86% (that’s 86% in one year, not a decade!), while the more prosaic, or “old economy,” stocks (per the S&P 500) gained a mere 21%. In 2015, the divergence was exemplified by the largest ten stocks (by market cap) in the S&P 500 accounting for a 17% return, while the remaining 490 stocks were down in aggregate -5%. Clearly, as Strategas points out, the last time the spread was this wide between the ten largest stocks and the rest of the market was the late 1990s.1 This certainly doesn’t suggest we are headed for “the worst of times.” In fact, after 1999, the following eight years resulted in those “old economy” stocks outperforming.
Apart from tech stocks being viewed by some investors as the sole path to riches, another similarity to 1999 is that several veteran hedge fund managers (or so called “smart money”) are concurrently closing their funds exclaiming in various terms that the current market is irrational and that “the current algorithmically driven market environment is one which is increasingly incompatible” with fundamental, research-oriented investment strategies. 2 While the hedge fund exodus is fascinating, I recall that one of Warren Buffet’s worst performing years were in 1999, which was ultimately followed by some of his best years. I believe that the “growth mania” in some stocks will subside, as “growth at any price” reverts to the more logical “growth at a reasonable price” methodology.
Additionally, I expect public equities to play a game of “catch-up” with the so-called “unicorns,” or private companies that have valuations of $1 billion or more. Already, we have seen some indication that this has begun to happen as several mutual fund groups have had to write-down their private company holdings by rather significant amounts in order to mark-to-market their portfolios. Fund managers are recognizing how much of a premium they are paying (as a multiple of revenue) compared to current S&P valuations and are slowly realizing that the “unicorns” may not be as mythical as once perceived. Perhaps the transparency and clarity in the public markets will again be considered a virtue.
Furthermore, I believe 2016 will show a continued steady rise in interest rates; however, I expect the US dollar will decline, in contrast with the overwhelming consensus. Anatole Kaletsky of Gavekal parallels our current interest rate cycle with the aftermath of the June 2004 and February 1994 monetary tightening periods.3 In both cases, the US dollar weakened and remained lower for an extended period of time. John Authers of the Financial Times provides an interesting clue on what the next trend in the dollar (versus the Euro) may be, and reconfirms the importance of expectations. He explains that “the second greatest daily appreciation of the Euro in its history came on a day when the European Central Bank cut rates and extended QE [quantitative easing] – a move that should unambiguously weaken the currency by making it less attractive for foreigners to park funds there.” 4
A weaker dollar will provide an unexpected tailwind to the earnings of multinational companies. The widespread pessimism that suggests we are heading towards a recession will eventually retreat and erroneous forecasts will be revised upward. S&P earnings should be enhanced as growth becomes more plentiful. The high-quality, financially stable, dividend paying stocks should thrive, as higher rates will dampen returns inevitably for longer-term bonds. The long awaited reallocation to stocks from bonds would be the tonic to add duration and renewed confidence to this bull market.
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates. This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.
Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 30 years of experience in the financial industry. Ms. Rosenau was recently ranked #75 in Barron’s 2015 Top 100 Independent Advisors and ranked #13 in Barron's 2015 Top 100 Women Financial Advisors. She was also chosen for Barron's 2015 Top 1,200 Advisors list, ranking #45 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.
1 Strategas. Weekend Reader. November 21, 2015.
2 Bloomberg. Nishant Kumar. January 1, 2016.
3 GaveKal. Anatole Kaletsky. November 9, 2015.
4 Financial Times. John Authers. December 4, 2015.
