Despite being crushed by the pandemic, the stock market just enjoyed one of the best quarters in 22 years, with the S&P 500 rising a whopping 20.54%. Before popping champagne corks, let’s look a little deeper.
One of the most useful ways to look at stocks is the distinction between value stocks and growth stocks. Basically, value stocks use their profits to pay dividends to their shareholders, while growth stocks use their profits to reinvest into the company, for research & development or acquisition or whatever. Older retired investors, who tend to be income-oriented, usually opt for value stocks. Younger investors, who don’t need dividends, usually opt for growth stocks. Likewise, conservative investors usually opt for value stocks, while aggressive investors usually opt for growth stocks.
So far in 2020, the S&P has lost 3.08%. Value stocks have lost 15.52%, but growth stocks have gained 7.93%. That wide difference is not normal. Digging deeper, we find the growth was concentrated in the six large technology companies, like Amazon, Apple, Alphabet, Facebook, Netflix, and Microsoft. The remaining S&P 494 have done substantially worse.
Historically, value stocks and growth stocks alternate as the best performer. This suggests that value stocks will soon reverse, taking the lead, but I don’t believe so. Since the Global Financial Crisis of 2008/9, growth has continually outperformed value. Again, this was due to the S&P 6, those large tech companies, that pulled the S&P 500 higher and higher.
We still don’t know all the long term changes resulting from the pandemic, but I wouldn’t sell any of the S&P 6 right now.