“dé•jà vu…1b: a feeling that one has seen or heard something before”
– Merriam-Webster
Even in the modern era, medical science is not what we could call an exact science, but, 15 months after the Wuhan outbreak, COVID-19 finally appears to be on the run. Economies everywhere are opening up, and levels of both production and employment are returning to the good old days of 2019. As a result, the more economy-sensitive stock market sectors, distinct laggards in 2020, have been marching right ahead, while the stay-at-home Growth/Tech superstars of 2020 have been struggling a bit. Not being trashed wholesale, mind you, but struggling just a bit. What now?
Yogi Berra was one great catcher, with, among many honors, three MVP awards and 10 World Series rings. Rightly or wrongly, he also is famous for the many well-publicized liberties he took with the spoken word. Yogi-isms they were called, and “it’s déjà vu all over again,” with its many layers of exquisite redundancy, is among the most famous. And, this particular Yogi-ism may apply to the current and maybe prospective sets of stock market circumstances. Allow us to explain…
Here we are in mid-2021. Unfortunately, mid-2021 has the stock market feel of mid-2000. Why?
Then as now, Growth stocks in general and Technology stocks in particular had been on a multi-year roll, and had outperformed low-priced Value stocks by a considerable margin.
Then as now, the valuation gap between Growth/Technology stocks and low-priced Value stocks was unprecedented.
Then as now, talk of a New Economy and a Brand New Era was everywhere, and was being used to justify the multi-year outperformance of Growth/Technology stocks and their high valuations.
Then as now – and we swear this is true – Growth/Technology stock performance was thought to be impervious to any rise in interest rates.
Then as now, a few rock-star analysts/portfolio managers were associated with this hyperbolic New Economy thinking, and the various Cassandras and their warnings were being dismissed as out-of-touch and passé.
Then as now, there had been several (what proved to be) portending shots across the Growth/Technology bow, i.e., one- or two-day, serious stock market downdrafts warning that all was not well in Growth/Technology land.
Okay, so what happened in late-2000/early-2001? Growth/Technology stocks, as measured by the Russell 1000 Growth Index, had a very difficult 2000 QIII (a more meaningful shot across the bow), which was followed by a -14.74% November and a -16.98% February 2001. Then, a long, multi-year slide. Including dividends, the Russell 1000 Growth Index did not hit bottom until late-2002, and, even more shocking, did not exceed the mid-2000 Index high until mid-2013, 13 years later.
Not to worry this time, as someone recently said on CNBC. Simply buy the great Growth stocks of 2021, and go to sleep. Seven to 10 years from now, you’ll wake up, and will have earned the superior investment returns that will have accompanied these superior growers, these marvels of American business.
Well, as you might have guessed, we’ve heard all of this before, and we have a few problems with such simplistic notions.
First, study after study has shown that one era’s big stock market winners typically are not those of the next era. Admittedly, that statement is fuzzy, without the kind of data-focused precision that we like; but, you get the picture. Times and conditions have a way of changing, and companies and their stocks typically do not grow to the sky.
Second, study after study has shown that the single most important determinant of multi-year performance is starting valuation. At year-end 2020 – and we touched on this in the February Update – the Russell 1000 Growth Index sold at 40x the earnings of its component companies, and yielded a paltry 0.66%. We’d be awfully surprised if that 40x goes to 50x over the next seven to 10 years and the dividend yield goes still lower.
Third, remember, from the similarly lofty valuation levels of mid-2000, 13 years passed before the Index made up all the ground that was lost. Not a year or two, or five years. Instead, 13. That’s a long time to wait.
So, déjà vu all over again in 2021-2022? Like so many others, we have no way of knowing for sure. But, should the possibility be dismissed so quickly? Well, history does rhyme, as we know, and a similar (to 2000-2001) Growth/Technology outcome is a cause for concern. Are we suggesting that Growth/Technology stocks be sold completely? Not at all, but we do believe that anyone who has an overly large position in the Growth/Technology sector of the stock market in mid-2021 should reconsider his/her position. The vibes are reminiscent of 2000, and are a bit worrisome.