The approval of several COVID-19 vaccines in early November of last year generated a “game changing” rotation from growth to value stocks. We are five months into this rotation driven by an early stage economic recovery scenario that we believe the stock market is starting to discount.
We agree that the 2021/2022 economic outlook is becoming increasingly robust, given significant pent-up consumer demand combined with record net worth, several trillion dollars of federal stimulus being distributed this year, vaccinations, and declining COVID-19 hospitalizations, all of which are improving consumer confidence. In a rapidly accelerating economic growth environment such as this, low-quality stocks tend to outperform high-quality businesses as investors seek out companies with more operating and financial leverage. That is precisely what has been happening since the vaccine approvals.
In our experience, equity markets are often 6 to 12 months ahead in assessing the business and economic environment. Once the acceleration in GDP starts to stabilize, we expect the relative performance of high-quality stocks will start to improve.
Index definitions: The S&P 500® Index is a market capitalization-weighted index that includes 500 of the largest U.S. companies. The Russell 1000® Growth Index is a market capitalization-weighted index of growth-oriented stocks of the 1,000 largest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The Russell 1000® Value Index is a market capitalization-weighted index of value-oriented stocks of the 1,000 largest companies in the Russell Universe. The Russell 2000® Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe. The MSCI® EAFE Index is a free float-adjusted market capitalization index that measures developed foreign market equity performance, excluding the U.S. and Canada. The MSCI® Emerging Markets Index is a free float-adjusted market capitalization index tracking the equity performance of global emerging markets. The J.P. Morgan Emerging Markets Bond Index Global Index measures the total return performance of international government bonds issued by emerging market countries that are considered sovereign (issued in something other than local currency) and that meet specific liquidity and structural requirements. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted index that tracks the daily price, coupon, pay downs, and total return performance of fixed-rate, publicly placed, dollar-denominated and non-convertible investment grade debt issues with at least $250 million par amount outstanding with at least one year to final maturity. The ICE BofAML US High Yield Index tracks the performance of U.S. dollar denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market. The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market (state and local general obligation bonds, revenue bonds, insured bonds and prefunded bonds). The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and they are not available for direct investment.
The commentary is the opinion of Kayne Anderson Rudnick. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
Past performance is no guarantee of future results.
Investing involves risk, including the risk of possible loss of principal.