Market Froth Abates: Lessons from a Historical Speculation

What Can We Learn About Growth & Value from the Dot.Com Implosion

The Market is Frothy Once Again!

KCR is not surprised at the amount of Wall Street shills claiming they can predict the Federal Reserve Chairman’s next moves. Equally unsurprising is the market’s overwhelming interest in how market conditions might shift based on a leveling off or outright reduction in interest rates.

The thinking goes like this: the stock market bubble that drove low-quality stocks to unsustainable levels could come roaring back to life if only the Fed would pivot. Our piece ARKK vs. QQQ in the Dot.Com Bust a few weeks ago tried to put this idea to rest. In that work, we highlighted the uncanny analog between the low-quality collapse of the dot.com bubble and the collapse today.

That paper provided evidence that the speculative dreck, or “innovation stocks” today, are of far weaker fundamental caliber than the Nasdaq was at this point in the dot.com collapse.

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Like that piece, today we will use the dot com bubble as an analog but zoom out and look at how the collapse in asset prices in the early 2000s played out in Growth vs. Value. While there is less “drama” here than understanding the role of investor confidence in the rubble pile of innovative tech, the message is no less important for disciplined asset allocators and money managers.

The chart below annotates the drawdowns in red and violent countertrend rallies in green from the peak of the frothiness in the market on March 23, 2000, to the trough on October 7, 2002.

These periods will drive the shading in the Growth and Value charts that follow – with red/green shading matching the S&P’s declines and rallies as defined above.

The chart below shows the performance of the Russell 1000 Value Index and the Russell 1000 Growth Index from the peak of the dot.com bubble to the trough.  In bubbles like 2000 and the mania that peaked in 2021, low-quality speculative firms often end up crowding into the “growth” category.

The fallout post the 2000 peak hammered growth investors by -60% vs. value by only -30% by the trough. 

The chart below shows:
• Navy Blue Line: the Russell 1000 Value Index from dot.com peak to trough
• Light Blue Line: the Russell 1000 Value Index from the 12/31/2021 peak through today
• Conclusion: Value’s performance today looks much like it did post the dot.com peak

Note: we maintained the left-hand scale to help with optical consistency when comparing value then and now with growth then and now in the following chart.

The chart below follows the same precedent and shows:

• Navy Blue Line: the Russell 1000 Growth Index from dot.com peak to trough
• Light Blue Line: the Russell 1000 Growth Index from the 12/31/2021 peak through today
• Conclusion: the R1G is doing a bit better this cycle than it did in the prior cycle at this point in the drawdown

Look at the valuation spread below. If you believe history rhymes, there may be more tough sledding ahead for Growth compared to Value.

The first two rows in the table below show the disparity between the Russell 1000 Growth and Value Indexes.  Our summary takeaway is: buying a large-cap growth index fund, something we have ruthlessly panned, means you are paying a hefty premium for the higher 3-year sales growth when compared to Value.

Underneath that, in the bottom row, is KCR’s Large Cap Model Portfolio. What do you see?

You can pay a lot less to get a whole lot more if you move away from the indexes.  As we are fond of saying: despite what you hear, numerous disciplined, slow-moving, low-cost, and tax-efficient managers are available in the space should you choose to follow the evidence.

While others focus on trying to time moves in speculative stocks, KCR will continue, as we always have, to march down the road of empirically derived reason.  Choosing to pay less for more profitable and healthier stocks strikes us as obvious.

We can hear the braying of the growth index fund complex already.  We get it.  This is an oversimplification.  Please find our top 75 ranked Large Cap stocks for statistically advantaged picks that may help you compound wealth more safely here or reach out to info@nullkailashconcepts.com if you would like our model portfolios.

A Closing Apology & Thanks to Our Loyal Subscribers:

At the start of January, KCR published two pieces highlighting some of our most popular charts from 2022.

The first, Short Term Stock Speculators Beat a Hasty Retreat, focused on a bevy of charts that provided brutally obvious evidence of the impending collapse of numerous types of speculative stocks.

The second, A Basic Industries Boom & the Return of the Real Economy, provided readers with a slew of charts showing the empirical evidence that capital was long overdue to rotate from novel tech into capital-starved essential industries.

In those pieces we made the mistake of putting out the original charts, as they were at the time of our missives in 2022.  After publication, KCR was inundated with requests to update the material.  First: we are grateful for our subscribers and their interest, and second, we have now updated all of the material.  This update can be found below.

KCR Equity’s Best Charts of 2022