Normally, I don’t like to use financial jargon like this. Most often, I’ve found the users typically end up being the least thoughtful and well-informed and are simply muddying the water, substituting jargon for real comprehension and insight. Even if that’s not the case, there’s the chance that the person you’re talking with simply won’t understand what you’re trying to communicate.
Still, this is what has come out of my fingers this morning.
The basic (and, I think, correct) idea is that equity markets tend to be led by the subset of stocks investors believe are exhibiting the fastest and highest quality earnings growth. But, after a significant run, the gap between winners and losers becomes wide enough that market attention shifts (rotates, as they say) toward the stocks that have been left behind.
There are a host of reasons why this happens. But they all come down, I think, to relative value. In the most extreme case, the long-term winners already have all of the good stuff that can happen priced into them, at the same time as laggards are trading at deep discounts to their liquidation values. So the former will, at least for a while, either go sideways or down, and the latter will either go sideways or up. In any event, the laggards will make up ground on the market leaders.
I think that we’re at one of these inflection points right now, where value stocks will perform well and growth stocks will lag behind. As I see it, this is not a radical change in market direction. I continue to think that a key element in the administration economic strategy, if that’s the right word, is to engineer a continuing sharp drop in the dollar that will serve as a tailwind for export-oriented and import-competing industries. Where the workers will come from to fuel this uplift is an issue left unaddressed. Assuming I’ve read Washington correctly, the best stock market strategy is to find companies with solid businesses and that have the combination of foreign revenues and domestic costs.
Last year this was the way to go.
Full-year 2025
EAFE +27%
NASDAQ +20.4%
S&P 500 +16.4%
Russell 2000 +11.8.
If we look at the results so far this year, however, they stack up as follows (prices as of just after 10am est this morning):
EAFE +8.8%
Russell 2000 (smaller-cap, US-oriented) +6.7%
S&P 500 +1.6%
NASDAQ -0.9%.
If I’m correct, and we are experiencing a counter-trend rally, we’ve already closed the gap between the Russell and the S&P, but there’s still a way to go to close the gap between it and NASDAQ. If I had to bet–I don’t want to, however–this is more an issue of time than of valuation differences.
Note, too, that the US continues to lag the rest of the world’s stock markets, as it has since the inauguration put the country’s current economic strategy in place.