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2020 Q3 Commentary - It Was The Best of Times, It Was The Worst of Times Thumbnail

2020 Q3 Commentary - It Was The Best of Times, It Was The Worst of Times

This famous opening passage from the Charles Dickens’ classic novel, A Tale of Two Cities, aptly describes the U.S. economy post-pandemic. Certain sectors including housing, autos, technology, and logistic providers have been very strong while travel and leisure, airlines, hotels, and restaurants continue to struggle. This bifurcation in the economy can also be seen in the stock market. Megacap technology stocks have been the key driver of the major indices, masking the fact that most stocks are still down on the year. This divergence can clearly be seen in the Standard and Poor’s 500 Index (S&P 500), whose performance is weighted according to the size of the company in the index, as compared to the S&P 500 equal-weighted where the performance of the same 500 companies is equally weighted. While the S&P 500 market capitalization index is up approximately 5% on the year, the S&P 500 equal-weighted is down almost 5% on the year. Investor enthusiasm to own growth stocks, especially technology stocks, at almost any price has led to very lofty valuations for some companies. We are observing a clustering effect where investors bid up growth companies and largely ignore value companies that are growing their earnings at a slower pace but offer valuations that are historically very compelling. The following data points highlight this dynamic.

  • During the week of August 17th, as the S&P 500 index closed at an all-time high, every single sector in the U.S. stock market had more decliners than advancers. This is a very rare occurrence, happening only four times since 1998.
  • 20% of S&P 500 companies were more than 50% below their all-time highs in late August. In addition, the average stock in the index was still 28.4% below its peak, even though the index was reaching new highs.
  • The Nasdaq 100, comprised of the largest technology stocks, was up more than 2% on August 26th while the Russell 2000, a benchmark for small company stocks, was down more than .5%. That has only happened eight other times in the last 30 years. All in 2000, 2001, and 2002.
  • For the 1st time ever, the market capitalization of the U.S. technology sector ($9.1 trillion) exceeded the entire market capitalization of all European companies ($8.9 trillion). As recently as 2007, Europe was four times the size of the U.S. technology sector.
  • Apple, Amazon, Microsoft, and Google have a combined market capitalization of over $6 trillion which is greater than every country’s entire stock market save the U.S. and China.
  • Historically speaking growth stocks are cheap (10th percentile) when they trade for six times sales. Growth stocks are expensive (90th percentile) when they trade for 15 times sales. Today growth stocks trade for 23 times sales.
  • The S&P 500 equal-weighted has gone nowhere in the last two years.
  • In early September when technology stocks sold off, in two days Apple lost $365 billion in value, more than the ENTIRE market capitalization of 491 companies in the S&P 500.
  • In late August, the S&P 500 market capitalization (combined value of the 500 companies)/U.S. Gross Domestic Product (GDP) ratio reached 132%, taking out the 2000 peak.

What does all of this mean? PYA Waltman believes there is an opportunity being offered up by the market to own world class businesses at fair or even cheap prices. The disconnect between value and growth stocks was already stretched going into 2020. It has gotten even worse this year. The Russell 1000 Growth Index has outperformed its value counterpart by eight percentage points a year on average for the past decade. The divergence has left value trading at about 16 times earnings and growth trading at 28 times earnings. The 12-point difference is way above the average four-point spread. Only the dot-com era valuation levels have seen higher spreads. In addition, there have only been eight ten-year periods over the last 90 years (total of 90 ten-year periods) when value stocks have underperformed growth stocks. Two of those occurred during the great depression, and the other spanned the 1990s leading into the tech bust of 2001. The other five are recent, representing the years 2014 through 2019. We believe the rubber band is VERY stretched in favor of growth and is bound to snap back at some point. We have taken advantage of this anomaly by adding to value companies at what we believe to be attractive prices. While we do have exposure to growth companies, and believe many of these businesses will continue to be dominant for the foreseeable future, we are concerned that the valuations of some of these companies are quite rich and have already factored in much of the good news to come.  


As we all know, a very contentious presidential election is now just weeks away. Investors are trying to figure out what effect, if any, this election will have on the financial markets. Even if we knew who would be elected, we can’t tell you with certainty how the market will respond. We can tell you how we “think” the market would respond, but that isn’t necessarily how it might play out. In 2008 when President Obama was elected, many believed the stock market would struggle. What happened? It rallied for eight years. Before the 2016 election, the narrative was that if Hillary Clinton was elected, the market would do fine as she was a known commodity, but if Trump was elected, the market would fall because he was an outsider with no previous policy experience thereby raising the level of uncertainty. As we all know, the stock market has done very well under President Trump. The main takeaway from these examples? There isn’t any certainty to how the market will respond to an election. In addition, there are numerous factors outside the control of the President and Congress, such as monetary policy and geopolitical events, that impact financial markets. Given the time horizon for your capital is 10 plus years and not the next three months, we choose to remain focused on what we can control. Namely, the construction of well-diversified portfolios comprised of world-class companies at a fair price. Great businesses run by great management teams are very resilient and will adapt to the environment they face. While there is a meaningful probability for market volatility around the election, we choose to remain focused on our longer term goal of protecting your capital from a permanent impairment while compounding it at a reasonable rate in support of your financial and life goals.

We remain thankful for the trust you place in us.

The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.  The Russell 2000® Growth Index measures the performance of the smallcap growth segment of the US equity universe. It includes those Russell 2000® companies with higher price-to-value ratios and higher forecasted growth values.  Past performance is not indicative of future results. This is not a recommendation to buy or sell a particular security. The holdings identified above do not represent all of the securities purchased, sold, or recommended for the adviser’s clients. A complete list of holdings is available upon request. The opinions expressed are those of the PYA Waltman Investment Team. The opinions referenced are as of the date of publication and are subject to change to due changes in the market or economic conditions and may not necessarily come to pass.  PYA Waltman (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. PYA-20-55