Speculation has become so extreme in the current market that option trading now exceeds overall stock trading volume. The fever has grown so intense that 40% of options traded are now the most aggressive zero-dated options, those that expire on the same day they are issued. Meanwhile, the S&P 500 continues to be dominated by the mega-cap technology companies, with the top four contributors to gains in the quarter — Nvidia, Microsoft, Meta, and Amazon — accounting for 45% of the market’s overall performance. In a speculative market like the one we have, we believe value and dividend stocks tend to be ignored or sold off. To measure just how much, Ned Davis Research has created a value index consisting of staples, healthcare, utilities, and telecoms. The index has fallen to the lowest level seen in the last 70 years (see below).Meanwhile, these same four areas of the market should all be beneficiaries of the AI mania driving the high-flying, big tech stocks.
Valuation Levels
Value relative to growth is also selling at levels that we have seen only at market lows, as you can see in the chart that follows. And the table just below the chart shows how value stocks have dramatically outperformed growth in the three-month, six-month, and 12-month periods following past oversold periods.
Alternatives
During speculative periods like this one, when the average stock has dramatically trailed the performance of a few popular stocks, we believe investors are tempted to look for alternative investments. In our last market letter, we wrote that brokerage firms were seeing heavy liquidations in common stocks and money was moving into alternatives, with flows into the various alternatives up 83% year over year, real estate and private credit being the most popular. Recently many questions come up about the wisdom of investing in real estate. Meanwhile, the highly regarded International Monetary Fund issued a white paper raising questions about private credit. The IMF concluded that small cap firms borrowing from Next 3 Months Next 6 Months Net 12 Months Growth (RLG): -3.90% -10.40% -16.50% Value (RLV): 63% 79% 74%? 3 private credit tend to be smaller and riskier than their public market counterparts, and the sector has not typically ever experienced as severe of an economic downturn as its current size and scope. Such an adverse scenario could see a delayed realization of losses followed by a spike in defaults and large valuation markdowns.
Because of the market’s high valuations and many other concerns, cash has been building up in investor accounts, in many cases by as much as 35%. As we see it, it looks like some investors are starting to become more risk adverse.
Conclusion
With value and dividend stocks now selling at one of the most attractive levels in history, we believe long-term investors with a three- to five-year time horizon should consider it a good time to be investing in a value strategy
Disclaimers
Barons, The latest options trades resembles past manias 3/20/2024
Nvidia (NVDA), Microsoft (MSFT), Meta Platforms (META), and Amazon.com (AMZN)
Ned Davis Research, 03/31/2024.
Source: BofA Global Research, Quantitative Profiles, 03/14/2024.
Past performance does not guarantee future results and there is no assurance any trend will continue. Investing in the stock market involves gains and losses and may not be suitable for all investors. Investing in equity securities is speculative and involves risk. Investing in foreign securities involves greater volatility and political, economic and currency risks and differences in accounting methods. Dividends are subject to change and are not guaranteed. Dividend income is just one component of performance and should not be the only consideration for investing. Cullen Capital Management, LLC. (CCM) is an independent investment advisor registered under the Investment Advisers Act of 1940 and is doing business as Schafer Cullen Capital Management, Inc. (SCCM). The Cullen Funds Trust (CFT), SCCM and CCM are affiliates. This information should not be used as the primary basis for any investment decision nor should it be considered as advice to meet your particular investment needs. The portfolio securities and sector weights may change at any time at the discretion of the Adviser. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that future recommendations or decisions will be profitable or equal the investment performance discussed herein. A list of all recommendations made by SCCM within the immediately preceding period of not less than one year is available upon request. Holdings are subject to change at any time. The S&P 500 Index is a market capitalization-weighted index of 500 companies in leading industries of the US economy. The index is unmanaged and has no fees. An individual cannot invest directly in an index. The views and opinions expressed are for informational and educational purposes only as of the time of the writing/production and may change at any time. The material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
