Yesterday’s Federal Reserve meeting might have offered a stay-of-execution for the value trade, but it won’t stop what’s already been happening…
Tech/growth is resuming its market dominance, slowly killing off value’s moment in the sun.
Yesterday, the Federal Reserve concluded its June policy meeting. As expected, there were no changes to the target rate, which remains at 0.0% – 0.25%.
What did change was the Fed indicated that rate hikes might come as early as 2023. At the last meeting in March, the Fed signaled it saw no increases until at least 2024.
Also, the Fed raised its headline inflation expectation to 3.4%. That’s a full percentage point higher than back in March.
In the wake of these surprises, markets are selling off. All three major stocks indexes are down. But, interestingly, they’re well off their lows – especially the tech-heavy Nasdaq, which was down 1%, but is now down just 0.10%.
On the dovish side, the Fed provided no indication as to when it will start cutting back on its aggressive bond-buying program. Plus, Powell said that the Fed would provide “advanced notice” before announcing its decision to taper its $120 billion worth of bond purchases each month.
Meanwhile, Treasury Secretary Janet Yellen, who testified before the Senate Finance Committee today, continued to downplay the threat of lasting inflation.
I previously said that I see important transitory influences at work and I don’t anticipate that it will be permanent. But we continue to monitor inflation data very carefully, and importantly for the long run inflation outlook we see inflation expectations by most measures … as being well-anchored.
Also, dovish were Powell’s comments that the so-called dot-plot projections should be taken with a “big grain of salt” and that the liftoff is “well into the future.”
All in all, the meeting is a slight speedbump for what’s been the resumption of the tech/growth trade over the value trade in recent weeks – after all, growth investors don’t like the higher inflation projections. But that’s all it is.
As we’ll look at in today’s Digest with the help of our hypergrowth specialist, Luke Lango, we’ve already been seeing the rotation from value, back into tech. And we expect that to continue in a big way as 2021 rolls on.
***Let’s begin by looking at what’s been happening in with value vs growth in recent months
Below, we compare two ETFs. The first is the Vanguard Value ETF (VTV). It holds traditional value heavyweights including Berkshire Hathaway, JPMorgan, Johnson & Johnson, and Comcast.
The second ETF is the Vanguard Growth ETF (VUG). It holds many of the biggest tech leaders in the market, including Apple, Microsoft, Amazon, Nvidia, and Tesla.
Let’s begin by comparing the two funds so far here in 2021. As we all know, value has enjoyed its moment in the sun. So, it’s no surprise to see it beating growth overall.
But now, let’s zero in on what’s been happening recently.
Below, we narrow our time-frame to the last month, since May 13, specifically.
As you can see, growth is up 7%, while value is up less than 2%.
But what else can we look at to give us clues why the tech/growth trade will continue to outperform value? Even with today’s surprises from the Fed meeting?
That’s where we’ll turn to look Luke and the economic data he’s been eyeing.
***The changing narrative that’s showing up in the economic data
For newer Digest readers, Luke is our hypergrowth expert, and the analyst behind the Daily 10X Stock Report. His specialty is finding market-leading tech innovators that are pioneering explosive trends, leading to huge returns for investors.
I don’t use the term “huge returns” loosely. Launching his service just last year, Luke has already dug up nearly 100 triple-digit winners and has identified 6 different stocks that have soared 10X or more.
So, what is Luke eyeing today that makes him believe tech-dominance is reasserting itself?
First, Luke points toward Citigroup Inc.’s Economic Surprise Index, which measures the degree to which data is either beating or missing expectations. The more positive the reading, the more that data releases in the prior three months have been stronger than expected.
From late February through mid-March, the reading spent much of its time in the 70s and 80s. But in late March, it crashed. About one month ago, it briefly went negative, as you can see below.
The latest readings out this week show the index has climbed back into the 50s. But that’s still well off its 2021-highs when everyone was proclaiming value was in, and growth was dead.
Here’s Luke with another index he’s watching:
Meanwhile the New York Federal Reserve’s Weekly Economic Index, a high-frequency indicator of economic activity, peaked in late April at 12.01%, and has since retreated basically every week since then. Today, it sits at 10.01%.
This slowing economic activity has diluted expectations for future growth and weighed on bond yields.
The 10-year Treasury yield – which, earlier in the year, marched from 1% to 1.75% in a matter of months – has come crashing down from 1.75% to 1.46% in April, May, and June.
***Even the mainstream media is coming around, realizing that the value-regime-change that was supposed to happen is fizzling
CNBC’s main headline last Friday read: “The great value rotation in the stock market may already be over as investors embrace tech again.”
Sam Stovall, the chief investment strategist at CFRA wrote this in a new research note: “I think in the short term, you have better potential with growth than value…”
Even Tom Lee, who believed that cyclical stocks would lead the market higher in the coming months is now singing a different tune: “We are rethinking which sectors will lead the S&P 500 to 4,440 by mid-year 2021.”
Back to Luke with what’s really going on here:
Folks, we are in the early stages of a mass market sentiment shift thanks to a big-picture narrative change.
In Q1, the market narrative was “buy value stocks, because the reopening will spark huge economic growth and push yields way higher.”
In Q2, the narrative has started to shift towards “buy growth stocks, because the reopening is losing steam and yields are falling”.
Economic growth will continue to moderate in the coming months as pent-up demand gets exhausted. Inflation pressures will continue to subside as supply chain disruptions get smoothed over. Yields will remain lower for longer on the back of weak growth, subdued inflation, and a dovish Fed.
And, as all that happens, growth stocks will sustain and even potentially accelerate their recent outperformance.
***So, what’s the best way to take advantage of this shift?
Earlier, we compared the Vanguard Value ETF with the Vanguard Growth ETF and found that growth was trouncing value over the last month.
But this ETF holds mega-cap stocks like Apple and Tesla. That’s not going to be the best place for your money.
Back to Luke:
Which stocks will be the biggest winners?
Hypergrowth small-cap stocks, because those are the stocks that are most rate-sensitive, which were the most beaten-up in February, March, and April, and which have the most ground to recover in the coming months as yields fall.
To Luke’s point, let’s now compare VUG, the Vanguard Growth Index that easily beat out the Value ETF earlier in this Digest, with FYC, which is a small cap growth stock ETF from First Trust. We’ll use the same time-period is before.
As you can see below, the small-cap ETF is easily topping the mega-cap ETF, coming in at 10.6% gains compared to 7%.
Interestingly, if we look beneath the hood at the holdings in FYC, we find that it’s fourth largest holding is the online retailer, Overstock.com (OSTK).
And guess who highlighted OSTK to his readers last November?
Here’s a blurb from Luke’s OSTK profile in the Daily 10X on November 4th:
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