Charles Payne: The old-fashion value investing thing has been as disaster

Key Concepts

• AI Team's Performance: The AI sector experienced a significant downturn, described as a "standing eight count" or "badly stunned."
• Market Breadth: Despite the AI stumble, a larger percentage of stocks are outperforming the S&P 500 in 2024 and 2023 compared to previous years.
• Sector Rotation: November saw a strong rotation into sectors like Healthcare, Consumer Staples, Energy, Materials, and Real Estate, which are typically considered value plays.
• Valuations: NASDAQ valuations have decreased significantly, while the Russell 2000 remains at its normal level. The S&P 500 is considered expensive, but the equal-weight S&P 500 presents opportunities.
• Value Investing: The historical performance of value investing, dating back to 1826, has been disappointing, with significant drawdowns.
• Small Caps and Bond Yields: Small-cap stocks, expected to have earnings growth, are currently more closely tied to bond yields, particularly the 10-year yield.

Market Performance and AI Sector Downturn

Charles Payne opens by describing the recent performance of the "AI team" as a significant setback, likening it to a boxer being "badly stunned" or taking a "standing eight count." This situation presents a dilemma for the broader market: can it hold up while these mega-cap names attempt to regain their footing?

Improved Market Breadth and Sector Rotation

Contrary to concerns about a concentrated rally, Payne highlights positive news regarding market breadth. He states that a larger percentage of stocks are currently outperforming the S&P 500 in 2024 and 2023 than in previous years. Furthermore, November has witnessed a "bona fide rotation" into sectors that have been discussed since October 31st. These leading sectors include:

• Healthcare
• Consumer Staples
• Energy
• Materials
• Real Estate

These sectors are traditionally considered "excellent value plays" and are expected to lift the "equal weight S&P 500." Payne confirms that this is indeed what has been observed.

Valuations and the Skepticism Towards Value

Payne then delves into market valuations:

• NASDAQ Valuations: Have come down significantly from their previous highs.
• Russell 2000: Remains at its normal valuation levels.
• S&P 500: Is considered expensive.
• Equal Weight S&P 500: Presents opportunities.

Despite the presence of opportunities, Payne expresses skepticism about the "notion of value," a topic he has been discussing for a couple of weeks. He acknowledges that there are "tons of opportunities hitting outside of the Mag7" (referring to the seven largest technology companies). However, he points out that "old-fashioned value investing" has been a "disaster," not just recently, but for the past couple of decades.

Historical Performance of Value Investing

To support his skepticism, Payne references historical data on value investing:

• Data Range: He directs viewers to a chart showing value drawdowns from 1825 to 2020.
• Benjamin Graham's Era: He notes that Benjamin Graham, a highly influential value investor who mentored Warren Buffett, experienced extraordinary success for 20 years after he began buying. However, Payne characterizes this period as the "golden age of value," questioning whether it can return.

Small Caps and Bond Yields

Finally, Payne touches upon the performance of small-cap stocks:

• Expectation: Small caps are generally expected to have earnings growth.
• Current Correlation: However, their fortunes currently seem to be more tied to bond yields.
• 10-Year Yield: He mentions the 10-year yield being "almost four, under four as that goes up," implying an inverse relationship or a significant influence of bond yield movements on small-cap performance.

Synthesis/Conclusion

The video highlights a complex market environment where a significant stumble in AI stocks is being offset by improved market breadth and a rotation into traditional value sectors. While opportunities exist, particularly in the equal-weight S&P 500 and outside of mega-cap tech, historical data and current correlations suggest a cautious outlook on the efficacy of traditional value investing, with small-cap performance being heavily influenced by bond yields.