Tectonic Market Shift:
In September we saw the beginning of a tectonic market shift, and we believe it will continue to create attractive investment opportunities going forward. Specifically, we saw dramatic mean reversion as small caps (IWM) and energy (XLE) (USO) bucked their year-to-date relative trends and moved markedly higher (see table below for details). We believe this is the direct result of US policies including tax reform, the unwinding of quantitative easing, and the expectation for higher interest rates.
We expect the multi-year rally in large cap growth (IWF) and technology stocks (XLK) to slow, and so should this year’s rally in international stocks as the US dollar continues its new trend towards strength. Going forward, we expect US small cap and value stocks to outperform. We particularly like the iShares Russell 2000 Value ETF (IWN) for its low-cost efficient exposure to small cap US value stocks.
All three of our Blue Harbinger portfolios performed very well in September (see performance below), especially benefiting from the start of this market shift, and we expect all three of them to continue performing extremely well going forward.
Asset Class and Style Performance:
For your reference, the following table shows empirically the asset class and style performance we have described above (this data is as of September month-end).
Blue Harbinger Performance:
And here is a look at the performance of all three Blue Harbinger strategies through the end of September (all three delivered very strong returns in September, and all three continue their long-term track records of significantly beating the S&P 500).
Our performance in September was helped by our intentional overweight to small cap stocks, and we continue to like our specific small cap holdings going forward. For more color, here is a month-by-month look at small cap performance this year (September was a great month for small cap, but it still has a long way to go).
Noteworthy, small cap stocks have less non-US exposure (they generally don’t have the same international exposure as large caps), and we expect this to be a strong positive going forward as US policies result in a stronger US dollar (more on this later). For perspective, the following chart shows recent US dollar performance (note the strong end to September).
Further, small caps have a very long-term track record of performing better than large caps over market cycles, and considering their underperformance so far this year (even after their great September) we expect small caps to do very well going forward. Now is an extremely attractive time to own small cap stocks, in our view.
Value Stocks are also particularly attractive now...
Similar to small caps, value stocks also have a long-history of outperforming the overall market across market cycles, which makes now a particularly attractive time to own value stocks. For perspective, here is a look at the long-term performance of small cap and value stocks versus large cap and growth stocks (note, small cap value dominates over the long-term).
This suggests to us that the large cap growth and aggressive growth technology stocks that have been dominated the market (see our performance table near the beginning of this article) are set to take a backseat to small cap and value stocks going forward.
US Stocks will do very well going forward...
Based on US policies (both monetary and tax reform), we expect US stocks to perform very well going forward relative to international stocks. Specifically, a less dovish fed (as quantitative easing rolls off, and interest rates rise) will help strengthen the US dollar. As will the lower corporate tax rates being pushed by the White House. For example, the following recent quotes from Goldman Sachs and JP Morgan help put the attractiveness of US stocks into perspective…
This week we contributed to another article on Seeking Alpha titled “Are You Patient or Complacent?” In our view, patience is important as a long-term investor because impatience can lead to too much trading, too much expensive transaction costs (commissions, bid-ask spreads, exchange fees, bad execution prices, short-term tax consequences) and mistakes overall. But at the same time, too much patience can become complacency. Rather than being complacent, we recently took big profits (+110%) by selling our Caterpillar shares (CAT) after holding them since January 2016. You can read our rationale for this trade here: Seeking Income: 5 Better Options Than Caterpillar.
Overall, we see some very attractive investment opportunities based on the tectonic market shifts that are just now beginning as a result of changing monetary and tax policies (as well as some good old fashioned “mean reversion”). For example, we like small cap, value, and US stocks (for the reasons described in this article) such as well-managed, low-cost, passive ETFs like the iShares Small Cap Value ETF (IWN). And if you are looking for more specific, lucrative, active opportunities, members of our Marketplace service, The Value & Income Forum, can view all of our current holdings (and members-only content) as of September month-end in this members-only report:
- Blue Harbinger Holdings And Performance Update (September Month-End, Members-Only)
Lastly, we leave you with an interesting quote from Warren Buffett...
"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
Disclosure: I am/we are long IWN.