With markets up 75% over a 12 month period, is there still room to run?
Investors have endured a tough time lately, and while broad market returns were in the green this week, volatility remained front and center. The S&P 500 gained 1.6% as a late Friday surge put the index within touching distance of its mid-February high. The Tech slip continued as the NASDAQ composite index finished the week down 0.6% as rising interest rates continue to fuel the rotation trade out of last year’s big winners.
Some investors remain perplexed by the recent tech sell-off, but after some epic gains over the past year, perhaps we shouldn’t be too surprised that certain sectors of the market are taking a breather.
Global cases of the coronavirus rose for the fifth straight week. The death toll continued to accelerate, with India and Brazil experiencing their worst periods of the pandemic to date.
While Tech and Small Cap trailed this week, U.S. large-cap value stocks outperformed growth stocks for the seventh week in a row.
The Russell 1000 value index, which includes energy, banks and industrial stocks, has gained more than 10% this year, outperforming its counterpart, the Russell 1000 growth index, which is just above break-even for the year.
Following weeks of sizeable yield jumps, the 10 Year Treasury fell from 1.72% to 1.67% this week. This deceleration in yields has halted the reflation trade that pushed energy and financials higher in recent weeks.
However, many bond traders remain concerned about the potential for current and future stimulus packages and pent-up household spending to create further inflationary pressures over the coming months.
The U.S. Dollar traded higher this week, supported by a wave of optimism due to improving U.S. economic data. The pace of the vaccine rollout relative to Europe also drew investors into the greenback.
A balancing act for oil this week as the Suez Canal blockage spurred fears of a supply squeeze while new pandemic lockdowns in Europe dampened demand outlook.
There has been a lot of market conversation around recent volatility and sell-offs across various sectors, but I think it is vital to take a step back to regain some perspective and perhaps curb investors’ enthusiasm following a record-breaking 12 months.
The S&P 500 has just experienced its best 1-year return since the 1930s, up 75% from the low point of the pandemic. While there are still high odds of gains in the next year, the rate of return will likely become much more ‘normal’ (8% historical average since inception). It is also important to understand that given the current high valuations, drawdowns and periods of volatility are inevitable, especially across sectors that have seen spectacular growth over the last 12 months.
Short-term market moves are notoriously hard to predict, and with ongoing uncertainty around the economic reopening and rising COVID-19 cases, forecasting has become even more uncertain.
With that said, the strong economic growth readings in the US, fuelled by massive stimulus along with a relatively good vaccine rollout, offers a more positive outlook for US equities relative to global equities in the near term.
Investors are still not getting paid for duration or credit risk in the bond market, so longer-term bonds offer little upside potential. If you need fixed income exposure to offset some growth assets, short-intermediate term, high-quality bonds would be the preferred option.
And as for the value vs growth debate. The recent tech sell-off does not suggest that all tech stocks are out of favour; it simply highlights a broader appetite to diversify across both growth and value.