I was very impressed by Chaim’s seven-stage model and found myself convinced.
I was also convinced by some observations from Verdad Research’s weekly e-mail, which I attach.
If you look at the trend in this manner, a correction is bound to come soon.
On the other hand, I don’t see it coming soon because the CAUSES for this crazy outperformance of large-cap expensive over small-cap cheap don’t seem to be going away. I don’t see any economic changes at hand.
It’s a fool’s errand to assign causes to market movements, so here goes my fool’s errand: if you have lots of money to play around with, you don’t care if something’s cheap or expensive. You just want to buy whatever’s shiniest. That is precisely how the market has been working over the last few years, and Trump’s tax cuts really exacerbated the problem. There are tons of people with too much money to spend. If, on the other hand, money is tight, you’re going to look for cheap stuff to buy. Does anyone think that money will become tight in the near future? That’s the only way I can see this trend reversing and small-cap value beating large-cap expensive.
I REALLY hope I’m wrong. And I’m of two minds. I have no idea if the trend will reverse or continue . . . In the meantime I’m trying to thread the needle by assigning less weight to value factors than I used to in some of my ranking systems.
Verdad Research email.doc (603 KB)