The last ten days of the quarter have been brutal for the market and in particular, growth stocks and the Broadleaf Growth Equity Portfolio (BGEP). March 18th sticks out as a unique date. Since then, the BGEP has experienced seven straight trading days of relative underperformance as compared to the S&P 500. For the past seven trading days, we have lost 428 bps of relative performance, wiping out the superior returns we had been enjoying relative to the index on a year to date basis just as the quarter winds down to a close.
Welcome to my glamorous world.
While it’s a mundane task, we've been keeping daily performance records of the BGEP and our comparative indices since we launched the portfolio nearly nine years ago. Having this data comes in handy for periods like today. In reviewing our records, there has only been one other period of consecutive daily losses where we gave up more relative performance; in 2008 we lost 439 basis points of relative returns over seven consecutive days.
Having more than six days of consecutive relative underperformance is a pretty rare event. According to our records, this has only occurred twelve times in the nearly nine year track record. The longest streak was just last year, when we underperformed for eleven straight days in a row and lost 310 bps of relative performance. Prior to that, seven days was the record, occurring three times, followed by nine instances of six days in a row of underperformance. On average, for the twelve such periods, we’ve lost 304 basis points. While this doesn't suggest that the current carnage is close to an end, it does suggest that we’d at least get a bounce sometime soon. I do not believe we are going into a recession as was the case the last time we had such a significant bout of underperformance in 2008.
What was so special about March 18th anyway? On March 18th, The Fed’s new chair, Janet Yellen, spoke publicly for the first time and based on her comments, reminded people that tapering efforts would continue and that rate increases could be closer than anticipated. While the Fed is NOT raising rates today, the market is anticipating that it will. As I mentioned in our 2014 Investment Playbook, the markets suffered horribly in 1994 when the Fed increased rates 300 basis points in a few short months. However, a few months later, when it was recognized that rate increases were merely a function of an improving economy and not significant inflation problems, stocks turned the corner and growth stocks in particular resumed their leadership position which they maintained for another six or so years. I suspect the same could happen this time around.
On a personal note, I would add that March 18th was also the day I left for a second short trip to Latvia. In 1994, Latvia, like many other post-Soviet territories, was a relatively new independent country following the end of the Cold War. In 1994, I also took a trip to the Czech Republic, another post Soviet territory, and wrote a graduate paper on the privatization process in that country. While Putin’s recent sabre rattling is a reminder that conflict isn't entirely extinct, it should also serve as a reminder of how far we’ve come in unleashing the productive potential of truly free individuals.
It has been a very rough ten days – in fact – nearly in record territory. While it is easy to point out and even forecast the likelihood of such events – again see our last update - it isn't possible, in my opinion, to time them successfully, particularly when the weakness can be so short lived, as was the case in 1994. It would also be a mistake to not point out the fact that the Fed hasn't even started to actually increase rates yet, suggesting that the current pullback, though warranted on logical grounds, may be entirely premature.