The bigger they are, the harder they fall.
In the August update issue of High-Yield Investing, I pointed out that a narrow group of six tech stocks had accounted for virtually all (98%) of the market's year-to-date gains. I've seen this behavior before, most recently in 2015, when the ten largest stocks in the S&P 500 represented more than 100% of the index's return while the other 490 were net losers.
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It's easy to forget about dividends at times like this. Who can get excited about a 4% annual income stream when stocks like Amazon.com (Nasdaq: AMZN) and Netflix (Nasdaq: NFLX) soar 69% and 92%, respectively, in just eight months?
But then the Dow surrendered nearly 1,400 points in two days in October, throwing some cold water on those red-hot gains. Apple (Nasdaq: AAPL) fell 5.5% in the market swoon. Amazon retreated 8.1%. And Netflix plunged 9.6%.
That doesn't mean these highfliers are about to crash and burn. In fact, they've already rebounded off their lows. But gravity always reasserts itself in time -- and tumultuous two-day pullbacks of nearly 10% demonstrate the vulnerability.
This was only a glimpse of what the next market correction would look like. And it wasn't pretty. The tech sector suffered its worst daily loss in seven years, which spilled over into the broader market and erased well over $1 trillion in market cap by the closing bell the following day.
Imagine a full-blown panic.
So what happens when confidence starts to buckle? Momentum-driven gains stall, money flows out of riskier assets, and investors pile into safer havens. Now, I'm not suggesting that a market correction is imminent. But it never hurts to be prepared by shifting into defensive value stocks.
Growth Stocks Have Ruled The Market
The tremendous run-up we've seen in the tech sector is part of a much larger trend where growth stocks in general have ruled the roost while value stocks have been largely ignored. Check out the performance gap that has emerged over the past year.
There are two clear takeaways here. Large-Cap stocks have dominated small-caps and growth has trumped value. So while we continue to see headlines of the major averages plowing ahead to record highs (at least until this month), the reality has been very different for income investors. Those with portfolios comprised mostly of value dividend-payers are lucky to have eked out a 1% or 2% return over the past 12 months.
It has truly been a tale of two markets.
And this isn't a new development. Here's how it looks over the past three years.
Since October 2015, growth has been outrunning value by roughly a 2-1 margin, across the entire market-cap spectrum.
Keep in mind, this period coincides perfectly with the Fed's current rate tightening cycle, which started three years ago. That means rate-sensitive groups such as master limited partnerships (MLPs) and real estate investment trusts (REITs) have not only had to contend with a negative market bias, but also the effects of eight interest rate hikes. Not surprisingly, many have turned in negative returns over this time span.
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In short, this has been a tough time to be a yield hunter. Given the market distaste for value stocks, I'm pleased that my High-Yield Investing portfolio has increased by 16% over the past 36 months.
But I want to reiterate a prediction made back in August:
Sooner or later (probably at the first hint of market distress), dividends will take on more importance -- and assets will rotate accordingly.
After this month's tumultuous selloff, I think the pendulum may finally be turning. In tomorrow's StreetAuthority Daily, I'm going to explain why I think that's the case -- as well as why "value" stocks may not necessarily be what you think.
P.S. My High-Yield Investing newsletter is devoted to not only finding the best, most reliable dividends on the market, but also to identifying and explaining different asset classes, and that leads to a more diverse and less volatile portfolio. With big-picture tactical planning, anyone can benefit from a well-balanced portfolio. If you'd like to learn more about all that High-Yield Investing has to offer, please follow this link.
This article originally appeared on StreetAuthority.com.