Asset Class Mean Reversion Review 2024 The 2024 Assessment of Asset Class Mean Reversion

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Since 2019, various asset classes have been under scrutiny for mean reversion effects and associated investment opportunities. Reflecting on key findings from the 2019 Seeking Alpha editors’ pick, β€œMean Reversion + Valuation = Portfolio Opportunities,” we will delve into how the landscape has unfolded and glean clues for future performance and top picks. This article represents the 2024 edition of the analysis, building on the previous evaluations.

Revisiting the Outlook from 2019

The December 2019 analysis highlighted several key takeaways:

  • U.S. equities are near their highest levels in history, based on valuation metrics. This suggests meager returns of 4-5% per year over the next decade.
  • However, based on reversion to the mean and attractive valuations, there are several appealing asset classes.
  • U.S. value, international, emerging markets, natural resources, MLPs, and gold present opportunities.
  • These assets have the potential for returns ranging from 5.5% per year to 11.6% per year in a Base Case scenario.
  • History has shown that it can take years or even decades for a reversal, requiring patient and bold investors to reap the rewards.

The retrospective data from that analysis indicated the prevailing landscape at the time.

Asset class annual returns

U.S. large cap (S&P 500) and large cap growth sectors had strong returns for the five and ten-year periods ending in 2019, outperforming their 20 and 30-year averages. Conversely, some assets exhibited returns well below their longer-term averages, hinting at potential mean reversion. The analysis raised the question of whether the strength of U.S. large caps and large growth might diminish given their robust performance at the time.

Will the recent subpar performance persist? If so, for how long? … Reversion to the mean often involves the pendulum swinging to the other side of the mean. Those assets that have outperformed swing below their long-term mean returns. Recent underperformers swing to return levels greater than the mean.

Evaluating Performance from 2020-2023

The subsequent years revealed a mixed landscape:

Asset class annual returns

Observing Mean Reversion in Action

The data pointed to mean reversion in play for almost all categories. Nearly every asset class exhibited improved performance from 2020-2023 compared to the previous five years.

Among the standout performers, U.S. small caps and small cap value recorded double-digit gains, along with a resurgent trend in MLPs and natural resources equities. Notably, the mean reversion calculus brought about a significant swing in returns for these assets, signaling a shift in the investment landscape. Gold also witnessed a notable upturn after a period of stagnation.

The Exception of Large Caps

However, U.S. large cap and large cap growth stocks defied mean reversion expectations, driven by the ascent of the β€œMagnificent Seven.” This group, encompassing popular FAANGS, spearheaded roughly 60% of the S&P 500’s gains in 2023, propelling large cap growth to a substantial increase.

US Growth vs Value return performance

Consequently, U.S. large cap growth stocks outpaced other sectors significantly over the past four years, albeit with remarkable volatility, including a sizeable decline in 2022 followed by a surge in 2023. U.S. large value stocks and smaller sectors also reported gains.

Lagging Foreign and Emerging Markets

On the other hand, foreign and emerging markets equities continued to lag behind their U.S. counterparts. Despite improvements, these sectors struggled to keep pace, influenced by global economic conditions and currency fluctuations.

US vs. Foreign Equity performance

These dynamics attest to the intricate interplay of market forces and the nuanced journey of mean reversion across various asset classes. The evolving narrative underscores the need for investors to adapt to the ever-changing investment terrain, irrespective of established trends or historical patterns.

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