Chart of the Week - The Best vs Worst
Hidden pressures are building up beneath the surface of the stockmarket.
And most people are ignoring this (some knowingly, others oblivious).
What we’re seeing is some of the most extreme relative valuation readings in history —and this type of setup has been a harbinger before of big moves, major changes, and generational opportunities for smart asset allocators.
I call this theme the Relative Value Trinity of Global Equities:
Small vs Large: the smallest stocks are much cheaper than usual vs the largest stocks (and we see this especially in the USA but also globally).
Value vs Growth: the cheapest end of the market is much cheaper than usual vs the more richly priced growthier end of the market (again, this is something we see globally, but especially pronounced in the USA with big tech outshining everything else).
Global ex-US vs USA: globally stocks are much cheaper outside of the USA both absolute and relative (for instance, over 95% of countries are trading at least 20% cheaper than the USA).
As with most big trends (and even manias) in markets the way we got here made a lot of sense — in fact one of the big reasons why we find ourselves here is that just over a decade ago we were sitting in the exact *opposite* situation.
Back in 2007 large caps were cheap vs booming small caps, overhyped global stocks were trading at a major premium to lagging and cheap US stocks, and value stocks were riding high on a global commodities and credit boom while tech stocks were a shadow of their former dot-com glory.
It was precisely those conditions that set the scene for what has been a golden decade in US/Large/Growth stocks — this is an important point because it goes to show that these things go in cycles and that there are always clues for those willing to look for them.
And I also want to emphasize that back around that time the dominant investing narrative had nothing to do with tech or AI, it was all about the rise of emerging markets, the allure of global banks, and the super cycle in commodities… it may seem obvious now, but back then it was unthinkable to go against the prevailing consensus and wisdom of the time.
I emphasize that because now it’s the opposite — it’s unthinkable to go against the prevailing wisdom of our time that US big tech is the only game in town. In fact you might get fired if you lean against the hype and froth that dominates today’s market, where US/large/growth has become overvalued, overhyped, and frankly overrepresented in the cap-weighted indexes.
There’s a lot more I could say about what’s been driving and reinforcing the trends that got us here, but I think in the end it’s best to just let today’s chart speak for itself (with particular emphasis on cycles and extremes).
And one more thing: there seems to be a growing chorus these days saying valuations don’t matter, and technically these guys are correct… valuations don’t matter until they matter (when the trend turns and the tactical indicators line up with the more strategic valuation indicators). But I would add to that one more key point that I’ve seen play out over and over: valuations might not matter …until they reach an extreme; when the pressures build up to such an extent that almost any catalyst (and often the least expected and initially smallest shift) triggers a major turning point.
And p.s. in case you didn’t notice the chart below is *extreme*. $S&P 500(.SPX)$ $NASDAQ 100(NDX)$ $Dow Jones(.DJI)$ $iShares Russell 2000 ETF(IWM)$
Key point: The relative value extremes building up across global vs US, small vs large, and value vs growth represents a major opportunity (and risk).
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