Repeat Performance?

There’s enough bubble speak out there so far this year to last us all of 2021, in my opinion. I’m not disagreeing the arguments being made but I’m getting to the point that if there’s a bubble will it just pop already so we don’t have to keep hearing about it?!?! With the amount of talk about a bubble now, I’m wondering if we’re anywhere close to a “popping” event or if there’s still a lot more inflating to come. Obviously, nobody knows but the contrarian in me is starting to wonder.

Along those lines, I came across the following in preparing my monthly client letter that I thought was worth posting today. The first chart displays the total return performance of the Russell 3000 Value, Russell 2000 and Nasdaq from January 1996 to March 2000. We’re all familiar with this period known as the inflating of the tech bubble which went on to pop in glorious fashion. If you would have invested equally in the Russell 3000 Value, Russell 2000 and the Nasdaq at the peak in March 2000, the Nasdaq return would still be less than half of the other two as of earlier this month (second chart).

Russell 3000 Value vs. Russell 2000 vs. Nasdaq Jan 1996 to Mar 2000

Russell 3000 Value vs. Russell 2000 vs. Nasdaq Mar 2000 to Feb 2021

The final chart for today’s post displays the total return performance for the Russell 3000 Value, Russell 2000 and Nasdaq for the period of January 2016 through early February 2021. Notice any similarities with the 1996-2000 chart?

Russell 3000 Value vs. Russell 2000 vs. Nasdaq Jan 2016 to Feb 2021

The slope of the Nasdaq performance line in 2000 was steeper than today’s slope, not that that means anything. The environment is different today than 2000 both fundamentally and from fiscal and monetary policy perspectives, but you can’t (or shouldn’t) ignore the similarity in relative performance. Here are a few thoughts I have on the matter:

  • The performance of the Nasdaq relative to value and small cap stocks today looks pretty similar to 2000.
    • This doesn’t necessarily mean the outcome will be the same, but we should all be aware of this similarity.
  • Buying at extreme market tops can result in years and decades of underperformance. Buyer beware.
  • Bubbles are part of investing and you shouldn’t really worry about them if you have a well designed investment plan you’re following that has resulted in a well diversified investment portfolio.

Focus on what you can control and minimize the distractions and noise that could lead to you losing control.