If, when this pandemic finally ends, you ever visit the city of Florence, please don’t bring a car. Florence is a beautiful city, full of majestic plazas and exquisite art. However, it was obviously not built for automobiles and is, for a driver, a maze of one-way streets.

For many investors, in recent years, markets must seem like a maze of one-way streets, with real interest rates steadily trending down, growth perennially beating value, and international stocks seemingly always lagging their U.S. counterparts. However, frustrated drivers eventually emerge from the labyrinth of Florence and markets will eventually trend in a different direction. The key questions for investors, of course, are why and when.    

In this extraordinary and difficult year, the week ahead should be quieter than average. Economic data on new and existing home sales, durable goods orders, unemployment claims and consumer spending will allow analysts to tighten estimates of the second quarter plunge in economic growth and the potential third-quarter bounce. Daily reports on the pandemic will give a nervous public a sense of whether fatalities can be expected to fall or rise in the weeks ahead. And political heat will gradually build as the November elections draw closer. Still, with half the year done and many taking what passes for “vacation” in stay-at-home America, this is a good time to assess trends in the markets.

For long-term investors, given the global pandemic and deep recession, the overall news is not that bad. Through last Thursday, as we show on page 62 of our daily update to the Guide to the Markets, a broadly diversified portfolio of financial assets was only down 4.3% for the year.

However, beneath the surface, this continues to be a frustrating environment for those who practice a fundamental rather than momentum-driven approach to investing. It is frustrating because the key assumption of fundamental investing is that relative asset prices will, over time, revert to some logical mean. However, in many cases “over time” is a long time coming.

For example:

•  Real interest rates have now been falling steadily since the early 1980s. This trend has left 10-year Treasury Inflation Protected Securities sporting a negative real yield of -60 basis points, guaranteeing any investor willing to hold such a bond to maturity that the reward for their saving today will be the luxury of consuming less in 10 years’ time.

•  Growth stocks have now outperformed value stocks in five of the last six years, including this year and sport a lagged P/E ratio of which is 59% higher than that of value stocks compared to an 18-year average of 32% higher.

•  In seven of the past eight years, U.S. stocks have beaten their international counterparts. Indeed, between December 2012 and May of 2020, in U.S. dollar terms, the S&P500 posted a total return of 149% compared to just 23% for the MSCI-ACWI ex U.S.

This last long trend is, in turn, a reflection of at least three others.

First « 1 2 » Next