So far in November, the markets have been absorbing waves of powerful and unexpected news. First, the markets rallied as it became apparent that Joe Biden would win the U.S. President election while Republicans would take more seats in the House. Then, last week the markets made another surge higher off Pfizer’s announcement of a 90+% effective rate for its COVID-19 vaccine followed by Moderna’s news of an even higher effective rate. With these promising waves of vaccine news grows hope that other vaccines in development will prove effective especially as positive COVID-19 cases once again move higher.
Investor & Boater Beware: “Mare’s Tails and Mackerel Scales Make Tall Ships Carry Low Sails.”
In boating, knowing the importance of stability can mean all the difference between a successful outing and a doomed voyage. Loading too much cargo and/or passengers in an area of the boat can adversely affect its stability. Since bad weather and strong currents can result in capsizing, boaters should always assess weight and placement to ensure a successful journey.
Like with boating, knowing an investment portfolio’s weighting is critical to understand how investments react to bouts of negative headlines, shifting market tides and performance longer term. Along with the recent market surge higher has been a strong reversal in market leadership. As the chart below shows, since early September, the value stock side of the market has rallied while many growth stocks have declined or stalled. While there have been multiple rotations from “work from home” growth stocks to “get out and move about” value stocks since the pandemic started, last Monday’s value over growth outperformance was a single trading day record1.
Value Outperforming Growth Since Sept 1, 2020
Time to Reconsider The Banks & Tanks?
As shown in the chart below, the performance drubbing by growth stocks over value stocks has gone on for many years and has even eclipsed the early 2000 dot-com bubble level. However, since COVID-19 emerged this March, the gap grew greater. Value stocks tend to be more economically sensitive and when the pandemic recession suddenly emerged, manufacturing, energy, and banks got hammered. Meanwhile, the work from home trend exploded as did the technologies and companies serving those trends (e-commerce, cloud computing, cybersecurity etc).
Growth Domination of Value – Changing Tides Ahead?
Source: Amundi Pioneer
What’s In Your Portfolio? Composition Matters
As the chart below shows, performance difference between growth and value is nothing new and can last for decades. However, given the disparity, it’s important to look below the market surface to understand what drives the value and growth performance divergence. The sectors with the highest weights and strong fundamentals typically fuel index performance over time.
Growth’s Clouds & Clicks Leading The Way: As the table below shows, the technology sector at nearly 40% of the Russell 1000 Growth index is by far the largest industry for growth. A key reason why growth stocks have outperformed value over the last decade is due to large technology holdings in the growth index including Apple, Microsoft, Netflix, Google, Amazon and Facebook.
Value’s Banks & Tanks Should Lead Again: The table below highlights that financials (banks) and Energy (tanks) are meaningfully higher weights versus the growth index. Though these sectors have lagged significantly compared to technology, the bank and tank companies should benefit from the eventual return to more normal economic conditions and a potential change in the inflation and interest rate environments.
The Most Challenging Times Bring Us The Most Empowering Lessons – Karen Salmansohn
Thankfully, we’ve experienced 10 years’ worth of vaccine research work compressed into 9 months. The Pfizer and Moderna announcements are tremendous rays of hope at the end of the tunnel. However, nearer term, there are still hurdles to overcome and, in a pandemic, the long term is not really where many humans (and investors) are focused. Instead, the long term is made up of a cluster of short-term possibilities. Optimistically, these short terms continue to consist of a continued economic recovery, increasing corporate earnings estimates, a supportive Federal Reserve Bank and a likely split government. While this scenario would favor the “get out and move about” value side of the stock market, that doesn’t mean one should abandon the growth stock ship.
Importantly, the current stock market regime teaches us the importance of knowing what you own and understand whether there may be unintended and unknown concentrations that could potentially capsize a portfolio. Maintaining a rightsized and balanced exposure to both growth and value investments can be a great way to deal with the ongoing uncertainty.
David Hone, CFA
1 On Monday, November 9, the Russell 1000 Value Index outperformed the Russell 1000 Growth Index by almost 6% which is a single day record.