In today’s Money Morning…tech on the rise in the US and Aus…non-stop stimulus until inflation arrives for good…ramifications far beyond the age-old argument of growth versus value…and more…
It should come as no surprise to most that value stocks have been on the rise recently.
Ever since late last year, we’ve been seeing markets and investors re-evaluate their portfolios. With a fairly large rotation out of speculative growth stocks and into more cyclical value plays.
A move that has been driven by fears of inflation, rising bond yields, and concerns over looming asset bubbles.
All of which is entirely reasonable.
After all, markets are wary of insane stimulus being thrown around by governments and central banks. The kind of fast and loose policy that logic suggests should lead to overvaluations.
So, investors did their best to impersonate Buffett and Munger, and went hunting for value. Wary of what looked to be a melt-up in tech, green energy, and a handful of other popular growth sectors.
Over the past week though, things seem to have shifted again.
The value rotation appears to be losing steam. While growth stocks, particularly the big tech companies in the US, are picking up again.
Could it be a sign that markets got it wrong?
Or, is this simply the last shakeout before growth makes a deeper decline?
Tech on the rise in the US and Aus
Overnight we saw US equities across the board perform fairly well.
The Dow Jones finished 0.17% higher — while the S&P 500 fared even better, up 0.42%.
But it was the NASDAQ that was the real standout. Closing 1.03% higher and inching closer to its previous all-time high — rallying on the back of a surge in big name tech stocks.
And it is not as if this has been a one-time thing, either.
All week we’ve seen the NASDAQ, and tech stocks in general, on the come up. A noteworthy reversal of the broader value theme of 2021.
Locally, on the ASX, we’ve seen a similar reversal unfold as well. With many of the big growth stories from 2020 seeing a resurgence over the past week or so.
Just take a look at everyone’s favourite market barometer Afterpay Ltd [ASX:APT]:
Source: Google Finance
But of course, this is just one example. For the full picture, we have to look at what is going on in the actual indices.
So, let’s take a look at US markets first:
Source: Trading View
Above are the six-month average returns for the NASDAQ (blue), S&P 500 (orange), and the Dow Jones Industrial Average (green).
As you can see, just like in the Afterpay chart, the NASDAQ endured a decent sell-off back in February. The height of the ‘value rotation’. Which saw its massive lead over the two other indices evaporate and put it close to last.
Now though, we’re seeing the NASDAQ claw its way back higher. Once again rising above its peers in terms of returns. A sign that perhaps growth is back on the menu.
Locally, it’s a similar story too. With our all-tech index (blue) also back on the rise versus the S&P 200 (orange). Take a look for yourself:
Source: Trading View
Which begs the question, why the sudden shift to growth, once more?
Well, as per usual, the answer is largely thanks to Jerome Powell and his central banking chums…
Non-stop stimulus until inflation arrives for good
Just as our own RBA met earlier this week, so too did the Fed. And as you should come to expect by now, both central banks reiterated their commitment to low rates.
Crucially though, Powell addressed the fear of inflation directly. Remarking that the bank expects to see some inflation this year in the US — just not of the sustainable variety.
This stubbornness seems to have eased any market fears of a whiplash response to even the slightest sign of rising inflation. Which has translated into a pile on once more for growth stocks. While also sending the US dollar and bond yields falling.
In other words, investors are banking on the generosity and ludicrous policies of the Fed once more.
Showering the US economy with fresh money, on top of the massive fiscal spending that is coming from Biden. All in all, it’s a cash bonanza, and that means growth is back in businesses.
Back at home, our market seems to be simply riding on the coattails of US market moves. Which is certainly partly due to our own loose monetary policy — but with far less involvement on the fiscal side by comparison.
The real question investors need to ask themselves is whether this will last.
Because while the ‘value rotation’ may appear to be dead this week, don’t be surprised if the narrative changes again next week.
That’s how indecisive and volatile things are right now.
With markets still seemingly unable to make heads or tails of our newfound economic situation. One in which central banks are either the saviours of capitalism, or the harbingers of monetary policy annihilation.
Only time will tell which narrative will be written in the history books.
But either way, it is hard to shake the sense that we’re in the midst of massive turning point. A scenario that seems likely to have ramifications far beyond the age-old argument of growth versus value.
For now, though, at the very least, the ‘value rotation’ has hit its first roadblock.
Until next week…
Editor, Money Morning
P.S: Promising Small-Cap Stocks: Market expert Ryan Clarkson-Ledward reveals why these four undervalued stocks could potentially soar in 2021. Click here to learn more.