The stock market showed improvement in the fourth quarter, although small cap and value stocks did not move up as much as growth stocks, particularly the glamour stocks: Facebook, Amazon, Netflix and Google. These “FANG” stocks provided nearly all of the market performance for the year where market averages were flat and the average stock was down 6%.
We have experienced two other periods in our career with similar narrow market “breadth”. In the 1970’s a group of stocks labeled the “Nifty 50” provided the out-performance for a time. These stocks included Polaroid, Eastman Kodak, Avon Products, Xerox and IBM, among others. In the late 1990’s the “Tech Bubble” was created. The famous stock successes of that period included Cisco Systems, Lucent, Qualcom and EMC.
Historically narrow market leadership gets taken to an extreme and a severe market correction ensues resulting in a rotation into neglected value stocks. We believe that for most stocks, a bear market has already occurred. Our forecast for 2016 assumes history will repeat itself and money will flow to attractive areas of the market that have been neglected in the past several months.
In our last quarterly letter we noted concerns about economic slowdown in China; these concerns continue at the moment but are secondary to the significant crude oil price decline. It’s certainly ironic that in the midst of these concerns, U.S. Automotive Sales are the highest they have been in years, consumer confidence remains high, jobs and wage growth are accelerating and cash reserves in the hands of institutions and individuals has gone up. A plausible explanation for some of this year’s market developments is the liquidation of stock portfolios by Middle-Eastern sovereign wealth funds in need of liquidity due to lower oil revenues.