Published May 21, 2021
Taking a step back this week to consider the broad market and the substantial changes that have been going on under the surface. At surface level, the broad market S&P 500 remains close to its all-time highs while our favored Nasdaq 100 index, heavy with tech and consumer stocks, has been choppy over the past four months.
Small and midcap stocks have been digesting their +30% rally from November, now trading in a very choppy way as the chart below shows.
The choppiness has come as the market has shifted strongly from favoring growth stocks to favoring value stocks. Value stocks have underperformed for years and years as the FANGMA stocks drove the market over the past decade. For the past few months, however, this trend has changed, with FANGMA largely moving sideways while value stocks received investor enthusiasm. The chart below shows the performance of growth and value stocks. We can see the growth stocks faltering over the past 3-4 months while value stocks have not missed a beat.
This shift in investor focus comes after a blistering 2020 rally in growth stocks propelled their valuations to record high levels. It is no surprise that the vertical nature of last year’s rally in growth begets this year’s relative rest in those stocks. Soaring earnings results so far in 2021 have reduced the elevated price-earnings ratios. Growth stocks P/E ratios (as measured by the Nasdaq) have dropped from 35x projected earnings to 32x while a more value-oriented mix expressed in the Dow Industrials trades at only 20x forward earnings (down from 21x to start the year).
This choppiness in the Nasdaq offers opportunity (and challenge) for our quantitative Nasdaq-focused models as they seek to profit from the ups and downs of the market, flush from their heady success in navigating 2020’s turbulence.
Stocks opened the week continuing to see the Nasdaq’s tech/consumer stocks under pressure. The index was down more than -1% before cutting its Monday loss to -0.4%. High-growth tech/consumer investors have been spooked by a fear of rising inflation and interest rates. Stocks slid again Tuesday, giving up early gains, as strong earnings continued to be met with lukewarm market responses. The S&P 500 dipped -0.9% on the day. Minutes from the recent Fed meeting noted some members wanting to start discussions on removing some monetary support for bond markets. The mere mention of a less accomodative central bank sent stocks and other risk assets tumbling. There was some buying of the initial thrust downward to pare the losses. Indexes closed off only -0.3% after being down well over -1%. Buyers came into the market Thursday to lead stocks higher by more than +1%. Applications for unemployment benefits continued to decline, perhaps giving investors a positive tilt on the day. The Nasdaq rose +1.8% to claw back the losses felt earlier in the week. Friday brought a flat session on little news. Despite the concerns about inflation, the 10-year U.S. Treasury note barely budged this week, holding just above 1.6%.
A slim -0.39% downdraft for the S&P 500 (SPY) while the Nasdaq 100 (QQQ) ticked higher by +0.19%. Small caps (IWM) slipped -0.48%.
Warm wishes and until next week.