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During the last 12 years, we have experienced one of the most challenging economic periods in our nation’s history. We have seen two deep recessions, including a global financial crisis in 2008 and a second slowdown partially triggered by the COVID-19 pandemic in 2020.

We have also seen unprecedented levels of Central Banker intervention, with the purchase of sovereign, mortgage, and recently even corporate bonds adding trillions of dollars to their balance sheets.

  • The Federal Reserve has added over $6 trillion since before the global financial crisis in an attempt to provide liquidity to the markets.
  • Corporate profits have mostly flatlined since peaking in 2006 before the global financial crisis.
  • However, due to low interest rates fueling the issue of bonds, corporate debt has doubled from $5 trillion to over $10 trillion in the last 14 years.
  • Here we see a comparison of corporate profit and corporate debt starting in 2006. As you can see, higher levels of debt have generally not led to higher corporate profits.

This combination of economic weakness, high levels of Central Bank intervention, low interest rates, and high debt levels has led to some really unusual behavior in the financial markets.

Many corporations that have not been able to grow profits during this period have issued bonds at very low interest rates and used the proceeds to buy back stock. The average corporation has not been so fortunate.

  • For example, the average stock in the U.S. has returned only 3.0% annual total return (1% price return + 2% dividends) for the last 14 years! The Value Line Geometric Index, below, a measure of the average stock in the U.S. markets, is up a paltry 16% since 2006, thus mirroring the behavior of corporate profits seen above.
  • A total of over $8 trillion in market capitalization is represented by only five Mega Cap stocks: Facebook, Apple, Amazon, Microsoft, and Alphabet/Google. These are known as the FAAMG stocks and are responsible for the lion’s share of returns experienced by the S&P 500 Index.
  • These five stocks have been incredibly successful in wooing investor attention at the expense of the remaining 495 stocks in the S&P 500. A FAAMG portfolio (equally weighted and rebalanced every month) compared to the S&P 500 Index year to date shows FAAMG stocks have gained 49% versus the S&P 500 Index at 8.84%.

So, what conclusions can we draw from this data?

  • The last 14 years have really been a tough market! Even titans like Warren Buffett have been flummoxed by this market, first buying airline stocks, and then later selling them at a loss. He even reversed his position on gold recently by buying stock in a gold mining company.
  • Preservation of capital has been more important in this challenging environment than trying to hit runs in your portfolio.
  • Diversification of our portfolios is necessary because we cannot reliably predict the future.
  • When you are diversified, there will always be an asset class, in this case, FAAMG stocks that outperformed, that you wish that you had loaded up on before the big move. The other asset classes you probably do not like because of mediocre returns.
  • Buying these big winners after their run can lead to really poor results; chasing returns rarely works in the long term. Remember that reversion to the mean can occur rapidly and often violently when market participants pile into one side of the canoe that is primed to capsize when expectations hit the wall of reality.
  • We do not expect these FAAMG stocks to continue their period of outperformance. In fact, we think that our portfolios are very well positioned to participate in the expected return of Small Cap Value Stocks.
  • As you know, we recently made a manager change to replace some of our exposure with a new fund manager called Avantis that incorporates a relatively new Factor of Return known as Profitability.
  • Our new portfolio allocations will be designed to assign a higher weight to those stocks that have the highest expected return using these factors: Small Cap, Value, Profitability, and Momentum.

If you have any questions, please do not hesitate to contact us.


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