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Market Perspective
What's Going On: Market Truths...and Consequences
 by Ernie Ankrim,
Chief Investment Strategist
Russell Investments
Investors have notoriously short memories
That's the only reason I can find for two current — and ultimately dangerous — investor perceptions.
One is that technology is the only play over the last five years in the US market. Certainly tech companies have been clear winners over the last five years. But checking the record, I found that over the last 20 years, the top four market sectors in the US were actually consumer staples, technology, health care, and consumer discretionary stocks. Tech wasn't the clear winner by any means. In fact, it was the top-performing sector in only one of four five-year "windows" during this 20 years. (Source: S&P 500 sector returns.)
Similarly, there has been no consistent trend proving that large companies will always beat small ones. Yet the recent record of US large-cap growth stocks has convinced many investors that this is the new investment truth. Or should I say "was" — both technology and large-cap growth stocks took dramatic dives in April.
None of us can predict the future — not even Russell's research director. That's why I suggest that investors resist the temptation to run after today's hottest funds. Diversification may not be the most exciting investing strategy, but it's proven the most consistent way to outperform the market over the long term.
Caution: Small moves can have a big impact in today's volatile markets
Charles Dickens might call it "A Tale of Two Volatilities." The fact is we're seeing an unprecedented level of general market and cross-sectional volatility among US large-cap stocks. This means that all the different sectors that make up our economy — technology, health care, consumer durables, etc. — are behaving very differently from one another. While tech stocks are zigging, retail stocks are zagging — and vice versa.
Historically, these sectors deviate from each other by a relatively moderate 2 to 5%. However, in 1999, we noticed that the degree of disparity between sectors has more than doubled.
This translates into dramatic differences in performance among actively managed US large-cap mutual funds. Until last year, the difference in returns between the best- and worst-performing funds in this asset class had been approximately 20 percent for a year. In 1999, this range, from top to bottom, has also more than doubled.
Given today's market environment, small bets, including which sectors or even which stocks a manager chooses, can have a much larger impact on fund returns than they would have even five years earlier. My conclusion is that portfolio managers — and fund investors — would be smart to recognize that the markets are riskier than they used to be. Investors will almost certainly be tempted, in such an environment, to switch to the hottest funds, because the rewards will look so much greater. However, nothing about these wild markets indicates that chasing performance has any better chance of succeeding today than it has in the past. Switching in this climate carries even more risk than normal. The consequences of even a single poor decision can be enormous in today's rock-and-roll markets. This, more than ever, is when staying cool will pay off.
Copyright © Russell Investments Canada Limited 2001. All rights reserved. See importamt Legal Information.
Date of first use: May 31, 2000.
This is a publication of Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Russell Investments Canada Limited.
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