By Nick Fisher, Portfolio Manager
A sideways moving market, as we have seen recently, requires a different mindset to navigate. Indeed global developed markets have been flat for a couple years now, emerging markets have been flat for 10 years, and US Small Cap stocks have had zero return since late 2013. Most Wall Street sources have described it as, "The most hated bull market ever." The following charts have us asking ourselves, is it possible the bull market ended and no one noticed yet?
Small Cap Stocks Flat for 2 ½ Years
While the whole market, as measured by the popular, yet misleading indicator of the S&P 500 is making record highs (see our previous conversation on the FANG stocks), the broader market is moving sideways.
MSCI ACWI (All World including US) Index Flat for 2 Years
International Stocks Flat for 3 years
Vitaliy Katsenelson wrote in his simple yet informative book The Little Book of Sideways Markets: How to Make Money in Markets That Go Nowhere, the "buy and hold" strategy does not work as well in a sideways market. Especially as we consider the massive uptrend we experienced during the 80s, 90s and prior to the financial crises. The strategy that works best is what Katsenelson describes as the "buy and sell" strategy. The buy and sell strategy uses a combination of Value, Growth and Quality to evaluate individual equities, sectors and asset classes to buy and later sell when full value is reached.
Let's use a couple of current examples to demonstrate. A couple of years ago we saw a maturely valued market and the probability of low interest rates for the short and medium term. Given this thesis, domestic dividend paying stocks were undervalued and we used a couple of ETFs to gain broad based exposure. Recently, those dividend-paying stocks reached our range of fair value and we sold those positions, rather than speculate that prices would continue higher.
This is our follow-up Chart of the Week in which we discuss these matters in more depth.
Our newest holding, the iShares International Dividend Fund takes advantage of the carnage in international markets. The British Exit from the EU (BREXIT) and related issues have created enough volatility that many quality, growing, international dividend paying companies have become a value. In fact, the fund was down more than 30% from its highs prior to our purchase and sports a healthy 5% dividend yield.
Similarly, we acquired energy stocks as they went from loved in 2013 to hated by the middle of 2015. We acquired Wal-Mart, Berkshire Hathaway and American Express to name a few more. It requires us to remain nimble and make decisions quickly, as oftentimes quality companies that have reasonable growth prospects, don't remain in the bargain value bin for long.
We have two distinct advantages in this type of market. First, our firm lacks beaurocracy and burdensome committees, which allow for a well thought out investment thesis to be executed quickly. Secondly, our size allows us to accumulate an individual position quickly, without moving the market.
Many experienced investment managers are saying this is the most difficult market they have ever experienced. One manager we follow even mused that even God would be fired under the guise that even perfect long-term information will lead to significant underperformance from time to time. We believe the best way to combat this is to remain vigilant with our communications, so our clients understand our thoughts and perspective. We are very happy with our performance year to date, but this remains a difficult environment.