INVESTING STRATEGIES IN THE GigEconomy: VALUE-RSP & MOMENTUM-SPY
تم تحديثه
Short and well-detailed idea on Value vs Momentum investing?; Series on investing- Dec 28th, 2019
What's the Equal-value weighted(RSP) vs Market-cap weighted, top heavy(SPY) ratio useful for?
- Simply for discussing how two of the most well known investment strategies have performed in the recent years.
There's many books written on this topic, but I will try to keep this post as short as possible.
1. First things first, here's the whole chart.
As expected, in downturns, large caps should perform outperform small caps, simply because of the lower risk. People tend to park their money in safe well-diversified stocks, when the systematic risks become too high. Vice-versa, in normal cycles and economic expansions, due to the higher betas, small caps outperform large caps. This was understandable for the short liquidity cycles in 2011-2012, and 2015-2016, which I discuss in my previous idea on liquidity cycles,
But what about post 2016? There was a few rate hikes, but at the same time both fiscal and monetary expansion, that gave an above average GDP growth. Interestingly enough, the RSP/SPY ratio, almost has perfect correlation with the treasuries spread(yield curve, US10Y-US03M). Nonetheless, momentum strategy kept outperforming value investing. The question is why?
2. One of the answers is of course, the rise in the gig-economy and automation. Small business, even listed small caps, simply can't compete anymore. Whenever a company has a competitive edge(i.e instagram) it gets acquired by the time it becomes too threatening. Unfortunately, the end product of this trend, I would argue has been overall lower market competitiveness. The second answer to the same question, is because of the rise of ETF's and ETF investing. In simple terms, ETF's magnify momentum outcomes. Buy high, sell higher. Greater up-trends, but at the same time greater down-trends!
3. Will the momentum outperforming trend continue in the future? As this trend has been going on for few years, it's very hard to tell how far the gig-economy will expand. Lately, there's been support for the idea to break up big-tech, but this will just takeaway the competitive edge that the U.S economy has over the world. Nevertheless, history has shown consistently, that trends typically revert to their mean, and as we head into the next decade there's a high probability that value investing will once again perform well.
To sum up this idea, with all said, I am taking the contrarian view. I think that we are entering into a speculative bubble. Obviously, things are looking quite well right now. Every-time, there's a minor chance of a market sell-off, the FED steps in with more liquidity. At last, the market will wake up at some point after the 2020 election(perhaps 2021-2022), and finally realize that there's no growth and no fundamentals supporting these high valuations(P/E consistently above historical average).
This is my view on value and momentum investing. If you are interested in a discussion, simply write a comment or send me a private message. Thanks for the continuous support!
-Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
For reference, fundamental investing is doing even worse than value investing.
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
What's the Equal-value weighted(RSP) vs Market-cap weighted, top heavy(SPY) ratio useful for?
- Simply for discussing how two of the most well known investment strategies have performed in the recent years.
There's many books written on this topic, but I will try to keep this post as short as possible.
1. First things first, here's the whole chart.
As expected, in downturns, large caps should perform outperform small caps, simply because of the lower risk. People tend to park their money in safe well-diversified stocks, when the systematic risks become too high. Vice-versa, in normal cycles and economic expansions, due to the higher betas, small caps outperform large caps. This was understandable for the short liquidity cycles in 2011-2012, and 2015-2016, which I discuss in my previous idea on liquidity cycles,
But what about post 2016? There was a few rate hikes, but at the same time both fiscal and monetary expansion, that gave an above average GDP growth. Interestingly enough, the RSP/SPY ratio, almost has perfect correlation with the treasuries spread(yield curve, US10Y-US03M). Nonetheless, momentum strategy kept outperforming value investing. The question is why?
2. One of the answers is of course, the rise in the gig-economy and automation. Small business, even listed small caps, simply can't compete anymore. Whenever a company has a competitive edge(i.e instagram) it gets acquired by the time it becomes too threatening. Unfortunately, the end product of this trend, I would argue has been overall lower market competitiveness. The second answer to the same question, is because of the rise of ETF's and ETF investing. In simple terms, ETF's magnify momentum outcomes. Buy high, sell higher. Greater up-trends, but at the same time greater down-trends!
3. Will the momentum outperforming trend continue in the future? As this trend has been going on for few years, it's very hard to tell how far the gig-economy will expand. Lately, there's been support for the idea to break up big-tech, but this will just takeaway the competitive edge that the U.S economy has over the world. Nevertheless, history has shown consistently, that trends typically revert to their mean, and as we head into the next decade there's a high probability that value investing will once again perform well.
To sum up this idea, with all said, I am taking the contrarian view. I think that we are entering into a speculative bubble. Obviously, things are looking quite well right now. Every-time, there's a minor chance of a market sell-off, the FED steps in with more liquidity. At last, the market will wake up at some point after the 2020 election(perhaps 2021-2022), and finally realize that there's no growth and no fundamentals supporting these high valuations(P/E consistently above historical average).
This is my view on value and momentum investing. If you are interested in a discussion, simply write a comment or send me a private message. Thanks for the continuous support!
-Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
For reference, fundamental investing is doing even worse than value investing.
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
ملاحظة
Another typo, it's supposed to be GOOGL instead of Microsoft as part of the FAANG stocks. Either-way, their performance is highly correlated, so it doesn't matter much. The principle is the same
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