It was a banner week for investors who love round numbers, but not necessarily for ones who love actual returns.
The Nasdaq Composite rocketed above 20,000 for the first time ever on Wednesday, less than five years after it crossed 10,000 and just weeks after the S&P 500 index crossed 6000 for the first time. But the thrill rapidly disappeared. The Nasdaq quickly retraced its gains after hitting the milestone and finished the week up just 0.3% at 19,927. The S&P 500 declined 0.6%, and the Dow Jones Industrial Average dropped 1.8%, ending Friday with a seven-day losing streak.
The Nasdaq’s rally has been driven by a few Big Tech names like Tesla and Alphabet—and their success may be masking fundamental weaknesses in the broader market.
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Most stocks outside of the tech industry have been in the midst of a gradual but persistent selloff. For 10 straight days through Friday, more stocks in the S&P 500 fell than rose, the longest such streak since 2000, according to Dow Jones Market Data.
Stocks that look cheap have gotten even cheaper. The iShares S&P 500 Value exchange-traded fund (ticker: IVE) has fallen for 10 straight days, its worst streak since launching in 2000. The daily drops haven’t been huge—more of a drip, drip that took the index down about 4% over the two-week period—but they show just how much the recent rally has been driven by the most exuberantly priced assets.
How rough is it for value-oriented investors? Last week, famed value manager Bill Nygren was shopping for razor blades when a drugstore employee who recognized him from TV approached him.
He says, ‘I bet your portfolio isn’t up as much as mine. I have everything I own in Bitcoin,’ ” Nygren recalled. “And, you know, he’s right. My portfolio isn’t up as much as his.”
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Nygren, the manager of the Oakmark Fund, has had a relatively good year even though he hasn’t been investing in digital coins. His fund had returned 20% through Thursday, versus 17% for the iShares Value ETF and 29% for the S&P 500. Nygren shook off the employee’s boast. “There are always going to be people making money in things that we don’t understand,” he said.
Several of Nygren’s bets have paid off. One winner has been General Motors, which is among his largest holdings. GM has succeeded by aggressively buying back its own stock at a time when the broader market was dumping it. It has gone from being a “frustrating” stock to a top performer, rising 46% this year, he said.
Nygren contrasted GM’s strategy to MicroStrategy, a software company that has issued more equity to buy Bitcoin. Normally, that wouldn’t be considered shareholder-friendly, but the stock is up about 500% this year, regardless, after gaining nearly 4% this past week. At some point, though, the tide may turn, Nygren said. “Our investment approach acknowledges that we never know when the market is going to correct valuation gaps, and that’s why being a value investor requires such patience,” he said.
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Investors shouldn’t worry about the bad breadth between winners and losers just yet, which may just be noise. “We’ve all been taught that broader rallies are better, and obviously—at least within the confines of the S&P 500—this is anything but,” wrote Steve Sosnick, chief strategist at Interactive Brokers. “I really wish I could assert that this is a meaningful signal, but it might simply be a statistical oddity.”
And that means investors should still feel relatively comfortable owning stocks heading into the holidays. “The party can continue, and Santa can arrive, whether with a sleigh or via interest-rate cuts,” he added. “But savvy traders should at least pay attention to some of the warning signs about the overall health of the market.”
