Building Wealth Doc's note: Some stocks are getting left behind as the market keeps hitting new highs. And in today's issue, Dr. Steve Sjuggerud explains why we're at a turning point in the market and where to look for your next investment...
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The "blueprint" of the 1990s Melt Up has held true...
Tech stocks are leading the market higher. Investors are chasing big gains. And it has gotten to the point where hedge funds are turning new money away.
Investors have once again left boring value stocks in the dust.
Following the late '90s playbook has worked out for investors, too. The same sectors that took off back then are soaring now...
I'm talking about tech stocks, semiconductors, and just about anything else that's exciting and high growth.
You want to own these growth sectors as long as the Melt Up continues. But the blueprint from last time around shows that this won't last forever.
So investors are leaving boring stocks behind, just like they did in 1999. And just like back then, that trend is almost certain to reverse at some point.
Let me explain...
The gap between growth and value stocks spiked during the final inning of the dot-com Melt Up. You can see this in the chart below. It shows us the growth-to-value ratio of the market...
To get this measure, we simply divide the S&P 500 Growth Index by the S&P 500 Value Index. When the ratio is rising, it means growth stocks are crushing value. And that's exactly what happened as the 1990s Melt Up peaked. Take a look...
The dot-com era was all about growth. Many of the companies behind these stocks didn't even have real business models. But that didn't stop investors from bidding up shares in the hopes of making incredible gains.
That led to huge rallies in high-flying sectors during the dot-com boom. Growth stocks crushed value. But then, the ratio peaked in early 2000... right as the Melt Up was coming to a close.
This is how market cycles work. One part of the market will outperform for years. And then, just when investors think that outperformance will last forever, it flips.
From 2000 through 2008, the ratio turned in favor of value. Take a look...
The growth decade was over. The boring value stocks that were left behind in the late 1990s came roaring back.
This drove the ratio down for most of the 2000s. It went from an all-time high in 2000 to an all-time low in 2007.
That cycle wasn't going to last forever, though. Growth stocks would eventually outperform value again. That's what we've been seeing over the last decade or so.
From 2009 until now, growth has been leading the market. And the gap between growth and value is back at an all-time high. Check it out...
You can see that the growth-to-value ratio shifted into high gear in 2020. We are now near the ratio's all-time high going back more than 20 years.
The surge we're seeing today is eerily similar to what we saw in 1999... as the Melt Up was nearing its final peak.
We are likely close to another turning point in today's market. With the ratio near all-time highs like it was in late 1999, a snap back to value is certain.
We can't know exactly when that will happen... But we know the Melt Up won't last forever. And when it ends – and a Melt Down takes hold – value stocks could save your portfolio.
We're not there just yet. But this market cycle is inevitable. Don't forget that when the good times finally end.
Good investing,
Steve Sjuggerud
Editor's note: Last week, our newest analyst Matt McCall explained why he believes the next 10 years will be the best years ever in stock market history. Matt has found dozens of 1,000%-plus winners over his career, and one of his most recent finds could soar 10, 20, or even 100 times higher than where it is now. If you missed the event, catch up on all of it here.