Leadership shifts frequently in the equity markets.\nSometimes growth outperforms value, sometimes small beats large. But you cannot\ntime the market or know exactly when one stock will outperform the other. So\ninstead of getting caught up in short-term, emotional decisions, I recommend\nmaintaining a diversified portfolio and focusing on key data points that can\npositively impact your investments in the long term. <\/p>\n\n\n\n
To help you do this, I am offering all readers our\njust-released Stock Market Outlook report. This report contains some of our key\nforecasts to consider such as:<\/p>\n\n\n\n
- S&P\n500 earnings growth<\/em><\/li>
- Outlook\nfor underlying U.S. economy?<\/em><\/li>
- U.S.\nreturns expectations for 2021<\/em><\/li>
- What\nproduces 2021 optimism? <\/em><\/li>
- Is\nit time to buy U.S. stocks?<\/em><\/li>
- Update\non U.S. fiscal stimulus<\/em><\/li>
- And\nmuch more\u2026<\/em><\/li><\/ul>\n\n\n\n
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT\u2019S FREE. Download the Just-Released March 2021 Stock Market Outlook<\/a>1<\/a><\/sup><\/strong><\/p>\n\n\n\n__________________________________________________________________________<\/p>\n\n\n\n
But while the past decade has ushered-in strong sales,\nrising user growth, and big stock gains for many technology companies, it has\nalso led to stock prices increasingly disconnected from underlying earnings.\nToday, there are a record number of public companies with zero or negative\nearnings, and many of them are technology companies trading at very high (sometimes\nastronomically high) P\/E ratios. Many investors thought the technology surge of\nthe late 1990s would never end, but we all know what happened then.<\/p>\n\n\n\n
Indeed, since 2007, the outperformance of growth relative to\nvalue is approaching levels not seen since the 1930s and the dot com bubble. In\nfact, the spread between the price-to-earnings (P\/E) ratio on growth and the\nP\/E ratio on value stocks is the highest it has been since 2000, when the\nbubble burst on many growth names. This is not to definitively say that 2021\nwill be the year we see a reality check for many growth names, but in my view,\nit is just a matter of time before investors rotate capital away from growth\nand towards value.2<\/sup><\/p>\n\n\n\n
The above argument is based largely on mean reversion, but there\nis also the inflation factor. Over the last twelve months, the federal\ngovernment and Federal Reserve have taken extraordinary measures to prop-up the\neconomy during the crisis. Unlike in 2008\/9, when fiscal and monetary stimulus\nlargely ended up parked in bank reserves, the fiscal and monetary stimulus of 2020\/1 has taken the form\nof direct transfers, such as stimulus payments to American families, as well as\n\u2018PPP\u2019 and \u2018Main Street\u2019 lending directly to businesses. The end result is that\na historic amount of liquidity is sloshing around the capital markets, and M2\nmoney supply (chart below) has risen at an unprecedented 25% year-over-year\nrate. This rate of change is even faster<\/em>\nthan during the inflationary period of the 1970s.3<\/sup><\/p>\n\n\n\n
M2 Money Supply\u2019s Surge Could Lead to\nInflation<\/strong><\/p>\n\n\n\n
![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/6_pic2-1024x395.png\")
Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n Historically, there is a fairly tight correlation between M2\nmoney supply and inflation. As M2 goes up, inflation usually follows. The writing\nfor inflation is on the wall, and that\u2019s not great for growth stocks.<\/p>\n\n\n\n
Here\u2019s why rising inflation could hurt growth stocks and help\nvalue stocks: upward inflation pressure may eventually put some pressure on the\nFederal Reserve to tighten monetary policy, which recent history suggests could\ngive way to market volatility and \u201ctaper tantrums.\u201d In my view, selling\npressure in response to higher inflation and tighter monetary policy will most likely\nimpact areas of the market with relatively high P\/E ratios. This could mean a\nreality check for many high-flying technology and other growth names, and could\ntrigger an investor rotation into value.<\/p>\n\n\n\n
Higher\nexpected inflation also implies upward pressure on the long end of the yield\ncurve, as investors demand more compensation for holding longer-term bonds. To\nthe extent inflation pressures also push up yields on the 10-year and 30-year\nU.S. Treasury bonds, we could see a steepening of the yield curve \u2013 a good\noutcome for Financials. It follows that Financials are the biggest\ncomponent of the value index, and the sector has recently underperformed. In\n2020, for example, the S&P 500 Financials sector delivered a return of\n-1.7%, while the S&P Technology sector was up +43.9%. I think the table is\nset for rotation.5<\/sup><\/p>\n\n\n\n
Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n
Leadership changes hands often in the equity markets.\nSometimes growth outperforms value, small beats large, foreign bests the U.S.\nAnd then the opposite becomes true for different periods. Timing each\nleadership change perfectly is near impossible.<\/p>\n\n\n\n
So, even though I expect value stocks to have a strong run\nrelative to growth in the medium to long-term, it does not mean I advocate\nshifting an investment portfolio entirely over to value. That\u2019s the beauty of\ndiversification \u2013 by maintaining exposure to most if not all key equity categories\nat all times, one can capture outperformance and limit volatility over time. <\/p>\n\n\n\n
If you\u2019re looking to increase your allocation to high-quality,\nvalue names, the Zacks Dividend Strategy actively invests in large and mid-cap\nvalue stocks with stable earnings, cash flows, and strong histories of dividend\npayments. It also ranks in the top 3% out of 729 managers in the Morningstar\nLarge Cap Value Universe as of 12\/30\/2020.6<\/sup><\/p>\n\n\n\n
In addition to finding the right investment strategy, it is important in times like these not to give into emotional investing, but instead to focus on key data points and economic indicators that could impact your investments. To help you do this, I am offering all readers our Just-Released March 2021 Stock Market Outlook Report. <\/a><\/strong><\/p>\n\n\n\n
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:<\/p>\n\n\n\n
- S&P\n500 earnings growth<\/em><\/li>
- Outlook\nfor underlying U.S. economy?<\/em><\/li>
- U.S.\nreturns expectations for 2021<\/em><\/li>
- What\nproduces 2021 optimism? <\/em><\/li>
- Is\nit time to buy U.S. stocks?<\/em><\/li>
- Update\non U.S. fiscal stimulus<\/em><\/li>
- And\nmuch more\u2026<\/em><\/li><\/ul>\n\n\n\n
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
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- Outlook\nfor underlying U.S. economy?<\/em><\/li>
- Outlook\nfor underlying U.S. economy?<\/em><\/li>