Growth vs. Value 

The S&P 500 continues to meander between 3200 and 3000. It has spent much of the last month between these points, and we believe it has shown little appetite to break from this channel. With the spread of the virus reaccelerating, earnings a week away, and the dog days of a Presidential campaign just ahead, the broad market has lacked conviction. This is showing below the surface as well. Sector breadth is well below its recovery highs, meaning that the percentage of stocks trading above their 50 day moving average has shrunk. The slow pace of the market is consistent with the historical summer norm. Typically, the market makes little progress in the summer months, and this is especially true for Presidential election years. We could see this sideways trek persist well into August. 

While the action in the S&P 500 of late could lull one to sleep, the growthier corners of the market are a completely different story. S&P 500 growth stocks made an all-time high today and have been on an absolute tear. The Nasdaq, an index heavily weighted towards high growth technology companies, has been on an even bigger tear. It is up nearly 25% year-to-date! Many names in these categories are on the right side of the economic impact from COVID-19 and are seeing an increase in their long-term earnings growth potential. Some are benefactors of the shift to stay-at-home. Some are positioned to gain from increasing demands for automation. Some have a solid digital platform they can exploit to the weaknesses of the old brick-and-mortar guard. Some are working on vaccines. Others are benefactors for a variety of reasons. The point is, there are a group of names who will come out of COVID-19 better than they went in. These have been leaders the whole way, and their continued strength is encouraging and noteworthy.

On the other hand, there are plenty of names that have been beaten down and are struggling to gain traction. These companies are more concentrated in the value camp, where there are greater concerns about the negative implications of the virus. Banks are worried about credit stress that could be looming, energy companies are still crippled by the plunge in commodity prices, many industrials haven’t seen their orders recover, and most staples are moving lower volumes. These companies are trying to survive, whereas many growth names are thriving. We’ve said for a long time that growth can be defensive, and that is absolutely true in today’s environment. 

In the weeks ahead, it is possible that this gap widens even more. Some companies will be coming into earnings touting their successes and the brighter futures they see ahead. Others will be trying to make excuses for bad performance and talking about the lack of clarity going forward. In a TINA (There IS NO Alternative) world, investors are going to buy stocks. It makes sense that they will continue to buy those that are performing well. They are doing well for a reason.  Some value names will ultimately prove opportune, but they must show some improvement before the market is ready to bite.

Thanks,

Preston May, CBE®
Research Analyst