As the saying goes, there are three kinds of falsehoods: lies, damned lies, and statistics.
That quote is often attributed to 19th century British Prime Minister Benjamin Disraeli. I doubt he was referring to financial matters. But there are few places where numbers are as frequently bent, twisted, adjusted, and dissected as the investment world.
Even when data isn't being deliberately manipulated, numbers can still paint a misleading picture. Case in point, you might be surprised to hear that nearly 400 large-cap U.S. stocks are in negative territory this year. That sure doesn't jive with the healthy 22% return of the S&P 500.
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But this market-cap-weighted barometer isn't representative of the market as a whole. The biggest of the big have disproportionate sway over returns. In fact, the 50 largest stocks in the index wield more influence than the other 450 combined. Scream all they want, the voices of smaller companies just can't be heard over the likes of Microsoft (Nasdaq: MSFT).
So when I tell you that the market has done pretty well over the past three years, understand that the gains haven't been evenly distributed. For starters, small-caps have struggled to keep pace with large-caps. The S&P 500 has delivered an average annual return of 14.1%, whipping the 9.9% of the Russell 2000.
And across the entire market cap spectrum, growth has been outrunning value by more than a 2-1 margin. That outperformance is encapsulated in the table below.
|Trailing 3-Year Returns||Value||Blend||Growth|
This is nothing new.
Barclay's (now owned by BlackRock) manages a pair of funds that have carved out these two broad segments of the market. The iShares Core U.S. Growth (Nasdaq: IUSG) gives investors access to about 500 large and mid-sized growth stocks, while the iShares Core U.S. Value (Nasdaq: IUSV) does the same for value stocks.
While identical in many regards, it hasn't been much of a contest between these two siblings. Aside from 2012, the growth fund has matched or beaten its value counterpart every calendar year over the past decade, outperforming by nearly 85 percentage points along the way (282% cumulatively versus 198%).
The Tide May Be Turning
For the most part, the S&P's big gains in this epic bull market have been driven by flashy growth stocks such as Apple (Nasdaq: AAPl) and Facebook (NYSE: FB), while steady dividend-payers like Johnson & Johnson (NYSE: JNJ) have been left behind.
Collecting a dividend yield of 3% or 4% almost seems quaint when tech stocks are delivering sizzling triple-digit gains. But this trend may have run its course.
What happens when there are ten people in one grocery store checkout lane and only one or two in the lane next to it? Before long, a few people will move and the lines will even out. We see the same kind of rotation in the market between asset classes when relative valuations become skewed – and it's long overdue.
A cooling economy could hasten the process. When confidence starts to buckle, momentum-driven gains stall, money flows out of riskier assets, and investors pile into safer havens. We may already be seeing the beginning of that cycle.
Two of the strongest performing sectors this year are utilities and real estate investment trusts. Both are known for their defensive qualities, steady cash flows, and lofty dividend payments. Dividend yields have really gained favor the past few months with the Federal Reserve cutting interest rates for the first time in a decade and bond yields subsequently slipping to record lows.
That shift has propelled funds like Schwab U.S. Dividend Equity ETF (NYSE: SCHD) to market-beating returns over the past three months. And I am confident that many of the income bastions in my Daily Paycheck portfolio will continue to shine in this low-yield environment.
One study concluded that when 10-Year Treasury Yields sink below 2%, the telecom sector is the place to be. Historically, Verizon (NYSE: VZ) has been the best performing Dow Jones component in these conditions. I won't complain if that pattern holds.