Weekly Wisdom – March 29, 2023

By Hightower Great Lakes on March 29, 2023

Market Dynamics

Since we are almost through the first three months of 2023, we find it important to look around at where investors are positioning themselves.

Passive investing has been on the rise for a few years, likely a result of the tremendous bull market that took place over the last decade. Low inflation; zero percent interest rates; loose monetary policies; and large technological leaps in computing, communication, and retailing have been drivers of the bull market.

However, these market dynamics have reverted. High inflation, 4% lending rates and tight monetary policy are reminiscent of a time before such technological advances were made. Like the market dynamics shifting, many culture and style trends have reverted as well – many of which present opportunities for investment.

While opportunities exist, a very challenging 2022 set the table for investors to be more selective about their investments in 2023 – one of the main benefactors here is the stock picker.

The stock picker aims to outperform their benchmark utilizing a higher turnover ratio and finding deals on undervalued stocks. Watch out passive investing! What is ‘old’ is ‘new’ again.

Some of the largest ETFs in the market have seen tremendous outflows since the beginning of the year. The SPY (SPY), an ETF that tracks performance of the S&P 500, has seen more than $10.15B in outflows YTD.¹

Further, the QQQ (QQQ), a Nasdaq Composite ETF, has seen over $2.31B YTD, while the DIA (DIA), which tracks the Dow Jones, has lost over $1.271B in the same timeframe.² These outflows are not a result of their performance; the SPY is up 4.08% YTD, QQQ is up 16.13% and the DIA is down 1.61%. The divergence in major indices also points to the assumption of 2023 being a stock-picker’s market.

Similarly, there has been a rise in active ETFs, such that they have grown to represent roughly $396B in AUM.³ An analysis done by Strategas Securities revealed that 62% of active large-company core funds, those that buy a mix of growth and value stocks, beat the market in 2022, the highest percentage since 2005.⁴

Cultural Dynamics

What is ‘old’ is ‘new’ again is not only a theme while looking at the divergence between active and passive managers. This theme is popping up in other areas of life, pop-culture and markets.

A ‘popular-again’ name that has recently come to attention is Foot Locker (FL), a company that solidified themselves as the go-to sneaker retailer in most malls across America over the last decade. They are looking to revitalize their business under new CEO, Mary Dillion.[1]

A big part of that is changing who they once were and focusing their efforts on the future of retail, which has a bigger emphasis on e-commerce and a smaller emphasis on mall presence.

Another brand that comes to mind is Barnes & Noble. Remember those huge bookstores? Now they are small, lean and local shops that focus on the landscape of the surrounding communities by offering services such as book clubs, cultural events and even art exhibits.

The automotive market furthers the point of ‘old’ becoming ‘new.’ Several OEMs have resurrected beloved models from the past. Toyota has brought back the Supra, Jeep has the Gladiator and Wagoneer, but one of the most grandiose returns has been the Ford Bronco. Produced from 1965-1991, the Bronco was advertised as a rugged off-road-capable vehicle to the American public.[2]

The Bronco made its return in 2020 as the Bronco Sport, which was a lighter-duty SUV; and in 2021 as the Ford Bronco, which was more reminiscent of the original off-roader.[3] The more popular Ford Bronco – which has been turning over at dealerships in record time – was one of the fastest selling vehicles on the market when released in 2021, and sells at an average of 20.6% above MSRP. [4]

Even in this hot automotive market the average vehicle is only selling ~9.9% above MSRP. Reflective of this strength, the Ford Bronco’s sales increased 70.7% sequentially while the Bronco Sport’s sales are up 22.3% sequentially.[5]

Yet another example of ‘old’ becoming ‘new’ is film photography. Film photography was the only way to process pictures prior to digital cameras and cell phones. Within the last five years, film’s popularity has skyrocketed, sending the price of a film camera to its highest price since the 90s.

As evidence, the Contax T2 camera, which retailed for $300 in 2006, can now be bought on eBay for $1100.[6] Another blast from the past is vinyl records. Now found in numerous large retailers, vinyl records saw their 17^th consecutive year of growth.[7] In 2020, vinyl record sales (41M) outsold CDs (33M) for the first time since 1987, and 43% of all albums sold were on vinyl.[8]

Interestingly, Gen Z is driving the vinyl resurgence. The cohort is 25% more likely to purchase vinyl compared to all other generations. The most noteworthy aspect of the resurgence is how only 50% of vinyl buyers over the age of 13 own a record player. The vinyl opportunity may be a bit harder to capitalize on, since 48% of these albums are still sold out of independent stores.

These examples illustrate the theme of reverting to the mean. While the fast-paced and easily-digested brands Spotify Music (SPOT) and Apple Music (AAPL), digital photography, and cookie cutter SUVs are appreciated by consumers for their ease of use, these same consumers have also come to appreciate a reprieve from the fast-paced mass consumer products that are purchased or leased “ready for consumption.”

The older consumer trends like bookstores, film photography and vinyl record players allow people to slow down to read, develop and listen at a pace that is more sustainable. A parallel can be drawn to capital markets.

Tighter monetary policy, along with higher interest rates and inflation, have forced investors to slow down, reconsider investments and allocate funds not at every opportunity, but where the best opportunities present themselves. For this reason, we believe it remains a stock-picker’s market.

While it may not be glaring, there are many trends that have come back into style, and if time is taken to read, develop and listen to the market, investment ideas may be more apparent than previously thought.

Click here to read last week’s Weekly Wisdom (3/23).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). As of March 28, 2023.

² Source: FactSet (chart). As of March 28, 2023.

³ Source: ETF.com. As of March 28, 2023.

⁴ Source: Bloomberg. As of March 28, 2023.

⁵ Source: Retail Dive. As of March 29, 2023.

⁶ Source: Joe Cotton Ford. As of March 28, 2023.

⁷ Source: Gear Patrol. As of March 29, 2023.

⁸ Source: Ford Authority. As of March 28, 2023.

⁹ Source: Ford March Sales. As of March 28, 2023.

¹⁰ Source: Collectiblend. As of March 28, 2023.

¹¹ Source: Billboard. As of March 28, 2023.

¹² Source: Business Insider. As of March 28, 2023.