Is the Low-Quality Rally Over?
Low-quality stocks tend to outperform at the bottom of a recession when economic activity is about to rapidly accelerate as the economy emerges from recession. This process started in early November 2020 when COVID-19 vaccine results of over 90% efficacy were announced. In the second quarter, low-quality stocks performed about in line with high-quality stocks, suggesting the stock market is anticipating continued growth. However, the rapid acceleration phase may already be behind us. Remember, the market is always trying to anticipate economic conditions over the next 6 to 12 months, and it seems likely that growth will continue but at a more moderate rate. Less fiscal support for individuals and increased taxes for corporations and high-income taxpayers seem like a virtual certainty and will clearly slow growth rates into 2022. It will be interesting to see over the next year if indeed low-quality outperformance has already run its course.
FIGURE 3: HIGH-QUALITY VS. LOW-QUALITY PERFORMANCE Russell 3000® Index
Past performance is no guarantee of future results. Announcement of vaccine efficacy date was November 6, 2020. Data is obtained from FactSet and is assumed to be reliable. Low Quality is represented by stocks with a beta of 2.0 and High Quality is represented by stocks with a beta of 0.5-1.0. Beta is a measure of a stock’s volatility relative to the overall market. Higher beta suggests higher volatility.
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 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.
All investments carry a certain degree of risk, including possible loss of principal.