Last week I noted how the consensus was bearish, with long institutional positioning decreasing and retail declaring whatever the CPI number may be or the size of the rate cut, was bad for the market. This kind of heard mentality, as we’ve discussed on many occasion, often leads to the complete opposite; a snap back rally.
We’re still in a period where small caps have extremely under-performed for many years, with the valuations of large caps continuously expanding. Those who have believed this disparity would end with IWM and related sectors taking the batten, have been met with extreme disappointment. I for one never thought things would get stuck in this range for so long.
Had you invested in IWM 916 days ago, you’d currently be negative 3% on your position, adjusted for inflation that number is much more sinister. Whilst I personally prefer to pick potential growth leaders within small caps vs purchasing an index, which for the most part has a lot of filler and fluff. It’s still note worthy just how terribly it’s performed.
Yet to the surprise of many, QQQ in 704 days (from covid highs) has only achieved a 15% return. Again, counting for inflation that’s far from a “bubble” number. Which is why the rotation idea still makes most sense and in my opinion is the most likely scenario.
I understand the cost of living crisis, political uncertainty and wars are playing a toll across the globe. Therefore I completely understand the bear thesis, the problem is so does everybody else. So far in 2024 the majority of funds have performed poorly, thanks to the narrow basket of stocks outperforming. Those who have had a less than positive year, which are the many, would likely prefer to see a strong decline in order to bolster their ego and soften the blow of moves they’ve missed. Again, considering this is the position of the masses, the pain trade would be to push past the negative news and rally much higher. Once those who missed the first rally have finally chased then just maybe we get a real move lower.
It’s also worth noting the consensus around the surge in AI investments and how that’s likely to produce little returns for investors down the road. As far as what we’ve seen so far, I tend to agree. A lot of the “chatbots” and “user software” have and will continue on a price war. I can see the margins of said products becoming so small that very few companies turn a profit directly from those offerings. Again, a bear thesis I totally understand and somewhat agree with.
The problem again, is this does not include the enormous innovations that come of it. Elon Musk has been harping on about autonomous driving for a long time now. To the point that even die hard fans begin to throw in the towel and for bear thesis of (90% drops) to resurface. Yet the potential TAM of such an offering, helped by the advancements in AI, is so large its hard to calculate. It also opens up a whole near era of automation & efficiency. It increases the likelihood of us finally using uber to call upon a small aircraft to skip rush hour traffic. Or for robots to cut the lawns and pickup roadside litter. I won’t get into detail regarding the offerings AI/machine learning improvements could provide, its simply a reminder that there are many bull cases for the market in general, people are just too emotional and tired to see it.
Therefore, moving forward, a focus towards smaller cap growth, value + growth and story stocks should put you in the money. I feel a lot of people will simply not trust the rallies in such sectors/names after years of misery, making the moves much more likely to stick.
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