Kevin Gordon, Senior Investment Strategist with Charles Schwab & Co., spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): With investors rotating out of big tech names like Nvidia, is this a good sign for the market?
KEVIN GORDON (KG): It can be. And we’ve had fits and starts of this actually just this year where in that March, April period where you had some of a pullback in the year-to-date winners, whether it was tech or communication services, and then a rotation into the so-called ‘deeper value’ or deeper cyclical parts of the market. Very much like what you’ve seen most recently a day where, you know, Nvidia was down sharply, but the Dow was up sharply or small caps were even up sharply. So I think it happens in fits and starts and I think would actually be a healthier sign, not necessarily, you know, gunning for a selloff at the mega cap stock end and rooting for everything else to do well, but giving the chance for the rest of the market to sort of catch up so to speak. Because you have now seen this pretty significant divergence in performance, whether it’s the cap weighted S&P versus the equal weighted S&P, which really started to split a few months ago, or it’s just large caps versus small caps in general. I think it gives more of a chance for the rest of the market to sort of catch its breath because when we start to see a breakdown in breadth statistics, as the market continues to make all-time highs at the index level, that sort of persistence of that divergence if it lasts for a long time can get you in a pretty tricky territory. It’s very similar to what we saw in sort of the back half of 2021, where you did see cap-weighted indexes make all-time highs, so almost continuously, but then the rest of the market was sort of faltering. If you had that persistence in divergence in the second half of this year, I think that would be more of a worrisome sign.
AM: It’s tricky, like you said, where it’s like, is this a sign that the bottom’s gonna fall out of big tech and panic will ensue or just slowly leveling out?
KG: I think it’s time to sort of add into the areas that haven’t done well. Of course ones that look attractive in terms of fundamentals, not just adding simply to something that hasn’t done well and then trimming from something that has. But again, it’ll depend on every individual’s portfolio and what makes sense for them. But I do think that yes, if you’re still, if there’s still strengths to this bull market that we’ve been in for about a year and a half, adding to higher quality parts of the market in particular that have lagged, that sort of should be doing well, I think makes a lot of sense. And a good example of this is even in the Russell 2000, that index did quite well at the end of last year and had a really nice move but then has sort of just chopped sideways this year, very frustrating for a small cap-oriented or a value-oriented investor. But if you look within that index, the high quality parts of that index have actually been doing quite well. So even if you bring it back to the beginning of 2023, the so-called “zombie companies” are down by double-digit percentage points. The non-zombie companies - just making that really clear split between the sort of haves and the have nots - those are up by double-digit percentage points. So you wouldn’t necessarily know it by looking at the Russell 2000 because it encompasses a good chunk of low-quality companies. But if you just take those out and you were much more focused on quality itself, then you could find out performance. I think it speaks to the fact that it may not always look like a healthy market at the index level. And certainly when you look at the individual member level, there has been a little bit of a faltering this year. But if you have your focus shifted towards higher quality parts of the market, you can find some pretty consistent outperformance.