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Could These Market Trends Be Close to Reversal?

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JEFF KLEINTOP: Being a contrarian is—well, it’s a great thing—but it’s hard to do emotionally, you know, buying those laggers and selling the leaders, and it doesn’t always work because sometimes a trend just continues. No one knows exactly when "a trend is no longer your friend," but we do want to be prepared when it looks like a trend is at an extreme and could reverse and take a big bite out of your portfolio. I think there were three stock market asset classes that are—where the trends are near an extreme right now, and that’s international versus U.S. stocks, value versus growth, and large- versus small-cap stocks.

Generally speaking, U.S. stocks have outperformed international stocks over the last 10 years, and the gap in relative performance has now reached the same extreme degree that we’ve seen ahead of prior reversals in that trend over the last 50 years. The late stage of the economic cycle and relative valuations also support a possible reversal in this trend of relative outperformance by the U.S. markets, and that could catch unprepared investors who haven’t rebalanced back towards international stocks.

Now value versus growth is another one. For much of the last 10 years, we’ve seen growth stocks lead the market, but, again, that gap in relative performance is getting to an extreme, much like we’ve seen ahead of prior reversals between those styles, between growth and value. Now, while the outperformance of growth may continue a bit longer, being prepared and rebalancing from growth to value may turn out to be wise.

And, finally, small- versus large capitalization stocks. After international large-cap stocks outperformed in the late 1990s, small-cap stocks made a big comeback. They outperformed by a wide margin since then, and rebalancing from small-caps to large-caps now may be smart, especially given the shift in financial conditions and the disparity in valuations that may favor large-caps.

Now the gaps in performance for these three asset classes I talked about are near the levels at which they consistently turned around in the past. So in our opinion it could be a good time to rebalance, be a contrarian and buy those laggers. The overall market, yeah, gets all the attention, but maintaining these asset class relationships in your portfolio are equally important to managing long-term goals.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Small cap investments are subject to greater volatility than those in other asset categories.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

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