Is the Market Rotating from Growth to Value Stocks?

Buyers continued to rotate out of Big Tech names in favour of small and mid-sized companies this week. The attraction would appear to be their lower Price/ Earnings ratios and their potential to benefit from lower interest rates ahead. (smaller companies are more heavily burdened with debt than larger ones for the most part) However, before you move all your chips out of names like Apple, Microsoft, Google, Amazon etc. to smaller companies and perceived “Value” stocks it is time to revisit the importance of diversification.

 Ok, even I am rolling my eyes over that one, but it has to be said that diversification helps us to stick to our longer-term goals and resist the temptation to react emotionally. I am not talking about “Di-worsification” , a strategy wherein you buy companies from all sectors no matter how dodgy just so  you cover all bets. What has worked for me over time is to combine growth and value names, large and smaller companies in a way that allows you to sleep at night and not feel compelled to switch back and forth depending on which group is doing better in the short run.

 As anyone who has ever been within the sound of my voice has heard, the S&P 500 Index has a long history of positive returns. It has risen over 70% of the last 96 years*. Those are good odds. One fairly simple diversification strategy to earn above average returns at risk levels you are comfortable with is to combine the S&P Index with individual companies we believe have outsized return potential. If you have held even a few of the mega-cap tech names over the last few years you will agree.

The broadening of both the number of companies and the sectors participating in the current Bull Market is encouraging. It is not, in my opinion, a signal to sell all last year’s winners. If those great companies now represent an obvious overweight in your portfolio or cause you undue stress, then by all means trim back on them and add to some superior quality smaller names and under loved value companies. If individual companies are not within investors risk tolerance or comfort level, then there are plenty of Index Funds to consider.

My team and I are happy to explain which companies or indexes might work for your long-term investment plans.

*2024 S&P Dow Jones LLC web site