This Bull Market Isn’t as Big as You Think
Just a few big winners are responsible for most of the stock market’s rapid recovery
By Jason Zweig
June 5, 2020 10:00 am ET
The gap between Wall Street and Main Street has never seemed wider—but much of it is an illusion.
Since it bottomed on March 23, the S&P 500 has shot up almost 40%—the highest return over so short a period since 1933, according to S&P Dow Jones Indices. For the year-to-date, the S&P 500 is down less than 3%, counting dividends. Meanwhile,108,000 Americans have died in a pandemic, 21 million are out of work and the country is seething with civil unrest.
This disconnect isn’t as extreme as it seems. Beneath the surface, much of the stock market is suffering, too. Most stocks are down this year, many by 20% or more. A few fortunate winners have generated big gains, fueling the misperception that losses have been minimal. The result is a market that isn’t as irrationally exuberant as it might appear.
U.S. stocks as a whole are far from cheap by historical standards, but the market isn’t blind to the calamities that surround us.
Yes, for the year to date, Zoom Video Communications Inc. ZM -1.31% is up 209%, Regeneron Pharmaceuticals Inc. 59% and Amazon.com Inc. 33%. But entire industries have been flattened: Earlier this week, airlines were down an average of 52% year to date; banks, 33%; energy, 32%; autos, 30%; consumer finance, 27%. Even utilities were down 5%.
Overall, of the 3,470 stocks in the Wilshire 5000 index that traded between Dec. 31, 2019, and June 2, 73% had negative returns for the year to date.
It isn’t unusual for the stock market to split into a few extreme winners and lots of losers. In 1973, a few darlings rose to near-record valuations while most stocks fell miserably. In 1999, technology shares shot up more than 80% even as many companies in the broader market languished and Warren Buffett’s Berkshire Hathaway Inc. fell 20%.
Seldom, however, has the gap between the haves and the have-nots been as wide as it is now.
In the first five months of this year, big growth stocks rose 6.1% while small, low-priced “value” stocks lost 25.6%. That was the biggest gap in performance between them over any such period since early 1999 and the second widest on record back to 1986, according to AJO, a Philadelphia-based investment firm.
Haves vs. Have-Nots
Despite the pandemic, massive unemployment and growing social unrest, U.S. stocks are down only a few percentage points in 2020. This helps mask wide return disparities.
The 50 most-expensive stocks in the S&P 500 as of last Dec. 31 were up an average of 11.3% through June 3, according to Drew Dickson, chief investment officer at London-based Albert Bridge Capital LLP. The 50 cheapest stocks, meanwhile, were down an average of 16.8%.
“People want to pay even more than they did for the stocks they already loved, and even less for the stocks that they didn’t,” says Mr. Dickson. “There’s no reason why that should be the case, other than a very fearful market thinking that big, expensive, high-quality companies must be safer at any price.”
Already out of favor going into 2020, small and value stocks suffered further as investors fled to perceived safety amid the pandemic and economic lockdown.
In recent days, small and value stocks have begun to show signs of recovery as the biggest, hottest stocks have flagged.
After all, when large growth stocks are “priced to perfection, they have to deliver on that just to maintain their valuation,” warns Nili Gilbert, co-founder and portfolio manager at Matarin Capital Management LLC in New York.
Such hot stocks as Amazon, Advanced Micro Devices Inc., Netflix Inc. and Salesforce.com Inc. are all trading for more than 50 times their anticipated earnings for 2020, according to FactSet.
“Maybe now, as the market believes that we’re going to be able to recover, some of those heavier industries, like cyclicals, materials and industrials, will lead the charge,” says Ms. Gilbert. “The expectations [for small stocks and value stocks] have gotten so low that that’s become a catalyst in itself.”
You could see a perfect example of that on Thursday, when shares in American Airlines Group Inc. soared more than 40% on news that the carrier would restore more flights to its schedule. Some battered stocks in such industries as hotels and recreation have already been bouncing back so sharply that investors should be cautious.
None of this means the dominance of growth stocks is definitively ending even as we speak. If you had a dollar for every time in the past decade a value-stock portfolio manager predicted value stocks were about to recover, you would be waist-deep in cash right now.
Yet it stands to reason that, in the long run, cheaper stocks will outperform more-expensive ones. Decades—even centuries—of history suggest that value should excel in the end, although the wait can be long.
Patient investors can overweight value stocks in their portfolios on the reasonable assumption that their underperformance can’t last indefinitely. And all investors should recognize that, while some shares are booming, the market as a whole isn’t as oblivious to economic hardship as it might seem.
Write to Jason Zweig at firstname.lastname@example.org