The Morningstar US Market Index fell 1.6% last week with most of the losses occurring on Friday. It would be easy to attribute this decline to higher-than-expected inflation data or concerns about tariffs. However, the lack of movement in interest rate expectations, lower government bond yields and little change in the value of the US dollar, undermines this narrative, while the relative performance of value (down 0.2%) and growth stocks (down 2.3%) suggest the ongoing change in investor sentiment as a more likely explanation. Evidence for this view can also be seen at the sector level as technology (down 3.5%) and communication services (down 3.3%) led the decline while formerly unloved sectors such as consumer defensive (up 1.8%) and energy companies (up 0.7%) continued to demonstrate the benefits of diversification.
In addition to providing stability during periods of market uncertainty, diversification can change our perception of history as recent returns are incorporated within longer term performance data. A good current example are the relative returns of value and growth stocks. Following the souring of investor sentiment towards large technology driven companies, the Morningstar US Value Index is now ahead of the Morningstar US Growth Index by 4.3% over the last 12 months.
Were Value Investors Right All Along?
Consequently, investors who eschewed over-priced growth stocks a year ago in favor of more attractively priced companies now appear correct despite growth ending 2024 ahead of value by 9.7% over the year. While hindsight is of little value to investors, careful analysis and an independent perspective is. Dave Sekera highlighted the opportunities in value stocks and the overvaluation of growth stocks in his US market outlook a year ago. This not only reminds us of the importance of patience but also the fact that stock price anomalies can become far more extreme before they revert to fair value. We should therefore avoid over-reacting to small deviations in market prices. Dave has just published his latest outlook and you can find a summary here.
Magnificent Seven Stocks – A Diversified Portfolio?
Reinforcing the idea that the market is a collection of individual companies, we also find diversification within the Magnificent Seven. While Alphabet GOOG, down 6.1%, Amazon AMZN (down 1.8%), Microsoft MSFT (down 3.2%), Meta Platforms META, (down 3.3%), and Nvidia NVDA (down 6.8%) fell sharply, Apple AAPL was flat and Tesla TSLA rose 6.0%. This stock level diversification can be a boon to active managers when it reflects a reversion of individual companies to a reasonable estimate of their fair values. However, some markets tend to be more favorable to active managers than others. To get the latest data on how active managers have fared in various markets, check out the Active/Passive Barometer.
Bad Quarters Make for Good Long-Term Investment Returns
As we close out the first quarter, most investors would have rather missed the start of the year, with US equities down 5.1%. While quarterly numbers are relevant for professional investors as they correspond with the timing of client reports, such periods are meaningless in the context of an investor’s time horizon. This is especially true when continuing to make new investments, as the longer prices stay low, the higher the likely return when the money is required. For example, if an investor started saving at 22 with the aim of retiring at 62 and increased their saving each year in line with average wages, 49% of their total investment will be made after their 50th birthday. Weak quarters can therefore strengthen long term returns for those that keep investing.
Jobs Report Due on Friday
There is plenty of economic data to keep commentators busy this week culminating in closely watched US employment report on Friday. However, the expected implementation of 25% tariffs on imported US cars and auto parts on Tuesday is likely to grab the headlines and cause some volatility in prices. You can keep up to date with all the economic announcements using this calendar.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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