The Big Story in Assets Is 'Turning Toward the Real'

Things are changing in the markets and the economy...

The period of low interest rates – and low yields for income investors – is passing. And we'll find opportunities in real businesses delivering real dividends.

We're now entering a "New Enlightenment" for income investors, after a decadelong Dark Age.

Part of this means we're seeing a tectonic shift... The economy is moving away from the modern crop of growth-obsessed CEOs. And instead, the markets are poised for a turn toward real profits.

Here's how I explained it to my Income Intelligence subscribers in November...

In an era where capital was cheap and growth king, spending every dollar on new employees and new projects made (some) sense.

We don't live in that world anymore.

Digital projects look less attractive than heavy real-world assets.

Borrowing costs have risen with interest rates, raising the thresholds for profitability.

And investors have developed less interest in supporting businesses that may be profitable someday, turning back to ones that return real capital to shareholders.

I'm talking about a long-term shift. And as it takes place, a certain type of stock will outperform...

For a time, investors preferred to sacrifice a near-term return for a moonshot potential outcome. Now, they're beginning to want something different – a real capital return, with companies that deal with real things in the real world.

No doubt, technology and software will continue to grow and lead to exciting things. But during the past couple years of supply-chain issues and more, we've learned that we need sources of energy... transportation... commodity metals to get pulled out of the ground... and robust utility infrastructure to keep the lights on.

For nearly a decade now, investors haven't cared about those kinds of stocks. And in turn, they haven't allocated enough capital toward keeping those activities going.

But now that money isn't "free" and investors who bought into some magic, digital future have been served their humble pie, this turn toward the real will happen.

Not only will these businesses outperform, but changing investor sentiment also means the market will ascribe higher value to their fundamental results.

This isn't a short-term trade. Valuable businesses have been ignored for a long time...

Here's what I mean: The following chart tracks the ratio between growth stocks and value stocks. While growth ran ahead in 2019 and 2020, value recently started to creep back...

So yes, as a trade, value makes sense in the short term. But it also makes sense as a decadeslong investment...

If you compare the 10-year returns of value and growth, you see a cycle through history. And you also see we are low on the cycle right now...

Over the long term, the ratio of returns between growth and value should be 1 if they provide the same performance.

But the historical evidence shows that you'll get higher returns in the long run by buying cheap value stocks.

Consider these numbers compiled by Cliff Asness, the billionaire founder of AQR Capital Management. If you'd bought the cheapest stocks and shorted the most expensive, you'd have earned an extra 3.6% a year from 1926 to 2014. And that pattern holds over most shorter time periods within that sample, too...

All this suggests that value has to catch up.

And given the shift in investor attitudes, the trauma of the market crash, and frauds that have driven investors from the "hot" stocks over the past year... the time is now.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: The "casino market" is behind us. Speculators have gotten burned... And Doc says fundamentals are taking the lead once again. This investment era is going to look very different from what we've seen in the past 20 years. That's why he recently revealed a strategy that accounted for 71% of all market gains the last time we saw an environment like this one... Get the details here.

Further Reading

"We're in a unique period of time," Doc writes. "The opportunities for income investments are unlike what we've seen in recent years." That's because of the overarching history of interest rates – and a short-term anomaly that's pushing yields higher... Get the full story here.

It isn't as exciting as a new technology or a hot stock tip... but buying value works. And it's especially important for income investors. The problem is, once you know to buy value, doing it may not be as simple as following a hard-and-fast rule... Learn more here.