Which way are investors going? Although the market rally has continued this year, many individual stocks have declined.
AMID all the market uncertainty of the last two years, investors have had a hard time knowing when to jump in. But once they have, they’ve at least known that their stocks stood a good chance of moving in the same direction as the broad market — until the last few months, that is.
Last year, when the economy was emerging from the financial crisis, more than 90 percent of the stocks in the Standard & Poor’s 500 index moved higher. Every sector of the market participated in the S.& P.’s gain of 26 percent for the year.
The year before that, as the credit crisis was heating up, every sector of the S.& P. 500 lost ground, as did more than 95 percent of the stocks in the index.
“You didn’t have to get the stocks right,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance, the asset management firm in Boston. “You were going to make money in 2009 if you bet on equities, and you were going to lose money in ’08.”
But this year, things have started to change. It’s a sign that this rally could be evolving.
Although the S.& P. is up since the end of December, its underlying components are much more of a mixed bag. So far this year, 376 stocks in the benchmark are up, but 124 are down. That means a quarter of stocks are bucking the market trend.
Strategists say that there is a simple explanation for this shift. Typically, in an extreme market crisis, like the mortgage mess of late 2007, most types of equities tend to lose money in lock step. That’s because investors race for the sidelines in the hope of finding safer alternatives — like bonds — to ride out the storm.
Then, when the panic is over, investors rush back into the market in unison to catch the inevitable rebound.
Now, equities are entering their next phase — one traditionally marked by lower stock market correlations, said Brian G. Belski, chief investment strategist at Oppenheimer’s equity research group.
According to Mr. Belski, stocks tend to diverge from one another in the year after a recession ends. And this trend often continues for two additional years thereafter.
To be sure, the National Bureau of Economic Research (the organization of economists that is considered the official arbiter of economic cycles) has yet to declare the end of this recession, which began in December 2007. But many economists believe that it probably ended sometime last fall.
And while stocks could start moving in the same direction again if the economy suffers another setback, “as long as the recovery continues on track, you should expect correlations to continue to settle back into more or less their historic norms,” said Robert D. Arnott, chairman of Research Affiliates, the asset management firm in Newport Beach, Calif.
If that’s the case, what does it mean for investors?
At the very least, it means that “people will have to start worrying about the value of assets, not just volatility in the market,” said James W. Paulsen, the Minneapolis-based chief investment strategist for Wells Capital Management.
More specifically, investors may want to consider tilting their portfolios toward undervalued or beaten-down shares, rather than highflying, growth-oriented stocks.
Historically, “value stocks tend to significantly outperform growth stocks in these environments,” Mr. Belski said.
That’s certainly been the case this year. Value stocks in the S.& P. 500 have gained 7.4 percent in price since the end of December, versus 4 percent for growth stocks. That’s a contrast to last year, when the S.& P. 500 growth index rose 29 percent, versus 17 percent for the S.& P. 500 value index.
THESE results repeat a historical pattern. In the 12 months after the 2001 recession, for example, value stocks lost less than their growth counterparts. And in the year after the 1981-82 slump was declared over, value stocks trounced growth shares, 23 percent to 16 percent.
Even if investors prefer growth stocks, market strategists suggest focusing on shares of fast-growing companies that also happen to be trading at relatively cheap prices — a strategy that’s often called “growth at a reasonable price.”
After all, if the market has indeed entered a new phase when its broad behavior won’t necessarily dictate the fortunes of individual stocks, it stands to reason that the fundamentals of a stock are likely to matter more.
And a fundamental question that investors ought to consider is the price they pay for their shares.
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
Read Full Article »