Growth and Innovation: Flowering is out of the pink

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Despite last week’s bad tape, calm is prescribed

In the run-up to the March 2020 lows, market leadership was in the hands of growth and innovation companies, both large-cap growth stocks and smaller companies believed to be the innovators of the future. Yes, there was a significant move on the part of the old economy stocks, but for the most part it was a situation where they were just trying to make up for the ground lost in the Covid crash. The move we saw in the tech / innovator sector was off-scale towards rising valuations. In the meantime, in the market bifurcated between technology and value, in existence since 2007, the differential between growth and value performance has widened even more (“Growth versus value: historical perspective”, Anchor Capital Advisors). This disparity appears to reverse.

ARKK Fund – The poster child for holding

Since February 16, 2021 (maximum valuation for the ARK Innovation ETF (ARKK) – $ 159.70 – closing Friday, $ 71.52), the market has begun to perform (as Warren Buffett calls it) its function for a long time. term of “weighing machine”. This is normal, predictable and very painful for those who have invested excessively in growth and innovation.

In any case, last Thursday and Friday (20/01 and 21/01/2022), fear and panic increased in a crescendo. Investors have begun to throw out the babies with the bathwater … good stocks at reasonable multiples with good earnings prospects. It felt like the start of the markets we saw in 2008 and 2020 without a stressed financial system or the unknowns of the newly discovered Covid-19 pandemic. Investor sentiment is in the dumper, with bullish sentiment at the lowest level seen in the weekly AAII survey since July 2020. It has registered 21% with a long-term average at 38%. Last week was the ninth consecutive week below that average and the highest bearish reading of the year (46.7%). All of this sentiment data is very constructive.

The negatives

The economy – the fact that retail sales shrank 1.9% in December – obviously didn’t go unnoticed. That’s easy enough to explain, as consumers were constantly being told to do their Christmas shopping early or run the risk of supply chain problems ruining their holidays. Some attribute it to the inflation that has hit demand. Think about it for a moment. People who were worried about not receiving the gift items they were buying would most likely have paid retail. People keep pointing to slowing employment growth as another concern. In my conversations with employers, they tell me that they keep looking for people and are simply not there to hire.

Covid – Omicron appears to be on the verge of extinction in parts of the country that suffered the onslaught in early December. Meanwhile, economic closures appear to be out of the question in response to new variations.

The Fed – The Fed will do what it needs to do to fight inflation. Meanwhile, the market appears to be doing it for them. See the 50 basis point move in the 10-year yield from the first of the year (from 1.41% to 1.9% on Thursday). It ended the week at 1.77% when buyers of flights to safety entered the market on Friday’s slide. Don’t forget that oil at $ 85 a barrel should likely be seen as a drag on the economy, allowing the Fed to move more slowly according to its planned hike schedule. Remember, these proposed rate hikes are all “data dependent”. One final note: current rates continue to be close to the financial crisis and Covid lows – emergency rates! Where is the emergency?

Inflation – Over the past two decades, we have had periods where a major market concern was potential disinflation – or worse – deflation. Until recently, it was a Fed’s goal to raise the rate above 2%. The biggest loser during this two-decade period was work. Labor is so scarce today that I hear of huge increases for hourly workers. $ 7.35 an hour was a joke, and now it’s a relic. It is not uncommon for unskilled labor to earn $ 15-20 per hour, in some cases with benefits. These are life changing leaps for many people. Sure, rising food and energy costs will consume some of these earnings, but rising wages will easily outweigh inflation anyway. By the way, they will spend every penny in the economy. At this point, inflation should not be viewed as negative. Not to forget, as we move forward, disruptions in the supply chain, one of the main factors contributing to the lowering of prices, should evaporate.

Russia – Their projects on Ukraine are a problem. It is hoped that the threat of sanctions will prevail over Putin’s desire to put the “Gang” (USSR) back together. If not, we may be involved in supporting delegates in this part of the world for years to come. Much to my chagrin, based on past experience, this probably won’t be bad for the stocks.

China – China is doing very well right now. I’m not sure why the CCP would like to upset the apple cart here. Here is a noteworthy headline: “Xi Jinping rejects the ‘cold war mentality’ and calls for cooperation from the World Economic Forum.” I hope you mean it.

One final consideration on growth versus value

According to a paper (“Growth vs. Value: Historical Perspective” – ​​linked above) put together by Anchor Capital Advisors “… if one had invested $ 1 each in value and growth stocks in December 1927, value investing today it would be worth almost 18 times the investment for growth. ” (Kenneth R. French).

Since 2007, value indices, according to Anchor, have been plagued by their strong weighting in financials and adhering to multiple P / E benchmarks instead of cash flow growth. Book price value and dividends (profit sharing with investors through bull and bear markets) are also characteristics of the value field. To me, the shoe seems to be on the other foot as the trade of growth and innovation loses its luster. I believe the secular bull market continues, with value driving the parade.

What is your opinion?

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