Marlboro Friday was a pivotal moment in US stock market history. Nick Ford, fund manager of the Premier Miton US Smaller Companies Fund, considers some eery similarities with today’s market.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Marlboro Friday in a nutshell
At certain moments in US stock market history there are turning points. Moments when there is a changing of the guard, a massive trend change. The end of a bull run in one key asset class.
US investors in their late fifties or early sixties probably remember Marlboro Friday, which is when on 2 April 1993 the American multinational Philip Morris announced a 20% price cut on its flagship Marlboro cigarettes.
The moment, in response to market share losses from generic competitors, marked the end of the popularity of defensive growth tobacco stocks.
What Marlboro Friday meant for active investors
For many active investors benchmarked against the S&P 500 Index, Marlboro Friday was an extremely unpleasant event. The news resulted in a 26% collapse in Morris’s stock price.
Shares in other widely held consumer product companies such as RJR Nabisco, the American conglomerate which sold tobacco and food products, and Coca-Cola also fell as concerns that blue-chip quality brand companies had been raising prices too much, enhancing the appeal of cheaper private label alternatives.
The mindset of investors changed that day with a new focus on the price or value of food or cosmetics products rather than purely brand power.
As Philip Morris represented 3% of the S&P 500 Index, holders lost a lot of money that day, and perhaps a lot more when accounting for the popularity of other brand name companies within the consumer staples sector.
For investors in US smaller companies, however, 1993 proved to be a fantastic year. The Russell 2000 Index, devoid of the popular brand power plays previously favoured by investors, returned 17% in dollar terms, over 10% more than the large cap blue-chip S&P 500 Index.
The US economy was in good shape and the higher growth potential of smaller companies began to appeal. Smaller companies became much more highly valued.
Russell 2000 Index relative to the S&P 500 Index
Source: Bloomberg, Russell 2000, S&P 500 13.12.1993 – 01.01.1993.
Past performance is not a reliable indicator of future returns.
Remembering the dotcom boom and bust
Later that decade, we witnessed the dotcom boom and subsequent bust going into the new millennium. Shares in companies involved in the build out and delivery of the internet initially soared to stratospheric valuations with names like Cisco (internet connectivity), AOL (internet content delivery) and Nortel (data transmission) among the most popular names held by investors.
Intel (semiconductors) and Dell (personal computers) were also favoured, as their business boomed driven by consumers rushing to get online.
There seemed to be little interest in the smaller companies sector, so when the internet bubble burst, investors in this asset class emerged relatively unscathed in the carnage that followed, with a 9% loss for the Russell 2000 Index compared to nearly 29% for the ‘blue-chip’ S&P 500 Index.
I have highlighted these episodes of US stock market history because, to us, the current situation looks eerily similar and underlines our conviction that smaller companies look set to provide superior returns compared to large caps.
What are the lessons for investors in smaller companies in today’s market?
Looking back, there seem to have been two common threads behind major outperformance periods of smaller companies: extreme differences in small vs large share price valuations and concentration within the S&P 500 Index, the result of a select few companies generating outsized returns beforehand.
Looking at where we are now, we have a situation where a small number of companies within the S&P 500 Index have produced incredibly high returns.
And as they are now very large constituents of the benchmark which active managers must try to beat, the risk of not holding them is too high for most to tolerate. This time the underlying driver of the gains of this select group of stocks (Nvidia, Microsoft, Alphabet and Meta Platforms) has been exuberance about artificial intelligence as opposed to the internet/dotcom or brand power themes seen in prior decades.
But in a similar vein to 1993 and 2000, the lack of interest in smaller companies has resulted in valuations reaching the same low point from which major outperformance cycles began.
Trying to predict the timing of a change in investor sentiment towards the small cap asset class is challenging, but we may have already seen the first signs that the AI euphoria might be about to recede.
On 19 April 2024, over the course of a single day, shares in market darling Nvidia plunged 10%, shedding more than $200 billion in market capitalisation.
Those who decided to sell that day will now have extra cash to deploy. Given the record low relative valuations of the small cap asset class, we would not be surprised if some of this money finds its way into stocks in the Russell 2000 Index.
With the benefit of hindsight, will 19 April 2024 eventually be viewed as a modern-day Marlboro Friday?
Nick Ford
Fund Manager, Premier Miton US Smaller Companies Fund
