Up and Down the state of the current Market

05/08/2021

Value vs Growth

The economy still looks that it is likely to expand strongly over the next couple of years. That is all what value stocks need to beat growth stocks.

Since 1979, the U.S. economy has grown quarter over quarter of the prior year on an average of 2.5%. When GDP growth is below that level, growth stocks outperform, largely because they can grow even when there is little growth to be had from the economy. When GDP growth is above that level, value stocks outperform growth stocks.

With GDP set to increase by 6.4% in 2021 and 4% in 2022, the stage is set for value stocks to outperform. Over the next 12 months the companies in the Russell 1000 growth index are expected to grow their earnings at 24%; whereas companies in Russell 1000 value index are expected to grow earning by 28%. This is the first time in a decade that the earnings growth offered by value companies is higher than that offered by growth companies. Yet growth stocks are priced as if they are leading the race. When growth is abundant you don’t want to pay a premium for it.

Value ETFs have started to outperform S&P500 index. Example VTV (Vanguard value index), VBR (Vanguard small cap value index), SDOG (ALPS sector dividend dogs) and VFH (Vanguard financial index).

Over the last decade value stocks have underperformed growth stocks. Has the tide turned and value will start outperforming? If the spurring of the economy is only because of the fiscal stimulus and is not sustained, then GDP growth will slow in a year or two and growth stocks will start to outperform again.

Inflation

As a result of the Covid-19 pandemic, the government’s response was to pump trillions of dollars into the U.S. economy. The current administration is rolling out trillion-dollar stimulus bills that we know the Fed will monetize by buying Treasury paper with money conjured from nothing. The Fed can do that because the dollars it creates are used globally as a store of value and medium of exchange.

The question: Is the fiscal stimulus from Washington spurring the economy? Or is it a one time shot in the arm, for the economy? It is, in any case boosting prices at the gas pump, grocery store and home-improvement stores.

This can be seen in commodity prices going up. DBC (PowerShares DB commodity index) is outperforming the S&P500 index.