Some investors are looking for bargains in beaten-down growth and tech stocks, betting they will shine as the Federal Reserve fights to slow the US economy and tame red-hot inflation.
Growth stocks – which have trounced their valued-focused peers over the last decade – have borne the brunt of the Federal Reserve’s hawkish turn this year, with the Russell 1000 Growth index down more than 11% year-to-date, compared to a more-than 5% loss for the benchmark S&P 500 index.
By contrast, value stocks – often defined as shares of economically sensitive companies trading at a discount to their total worth – are broadly flat on the year.
Underpinning those moves is the perception that the Fed’s fight against inflation will keep interest rates climbing, eroding the future cash flows that growth stocks are heavily valued on. Value stocks, meanwhile, have found support from a strong economy and surging commodity prices.
That dynamic could change if the Fed’s tightening monetary policy slows the economy. That would boost the appeal of growth names for some investors who believe their profits rely less on broader economic strength. The Fed raised interest rates by 25 basis points last month and has hinted at meatier increases ahead.
Expectations of an aggressive Fed briefly turned the spread between yields on two and 10-year Treasuries negative last week, a phenomenon that is often seen as an indication of worries about economic growth. Recessions have followed six of the last seven yield curve inversions since 1978, according to data from Truist Advisory Services.
“If these recession fears grow, then you are going to have a big shift away from value stocks,” said Esty Dwek, chief investment officer at FlowBank, who has been increasing her stake in technology stocks. “Sustainable earnings growth … will become more important again.”
Growth stocks have tended to outperform in the six months following yield curve inversions, with the Russell 1000 Growth Index rising by an average of 6.4% during such periods since 1978, compared to a 4.4 % gain for value stocks, data from CFRA showed. Growth stocks have fallen by an average of 0.6% during recessions, while value stocks have fallen by an average 6.8%, according to CFRA data.
The Russell 1000 Growth Index is up 320% over the last 10 years, compared to an 145% rise for its value-focused counterpart.
Earnings season kicks off next week, giving investors a closer look at how companies have fared at a time of heightened geopolitical uncertainty and rising commodity prices. Also on tap is the latest US consumer prices report, due out on Tuesday. The S&P 500 is on track to close down 1% this week, as worries over a more aggressive Fed slow a rally that saw the index pare its year-to-date losses last month.
Overall, investors have sent a net $4.2 billion to the Invesco QQQ Trust – which tracks the growth-heavy Nasdaq 100 Index – over the last three weeks, the fund’s longest streak of positive inflows since January, Lipper data showed.
Mayukh Poddar, a portfolio manager of Altfest Personal Wealth Management, has increased exposure to growth stocks in health care such as Boston Scientific and mega-cap tech names like Microsoft in anticipation that the Fed’s hawkish tilt will slow the economy, hurting value stocks.
“The Fed is telling us … that fighting inflation has become their priority and the only way they can fight that is to slow down demand,” he said.
Some on Wall Street are skeptical of a bounce in growth stocks, especially as bond yields continue soaring. Yields on the US benchmark 10-year Treasury recently hit 2.71%, their highest level since 2019.
“The period of extremely low interest rates was very good for growth stocks ― and very challenging for value investors,” wrote Tony DeSpirito, chief investment officer, U.S. Fundamental Equities at Blackrock, in a recent note. “The road ahead is likely to be different, restoring some of the appeal of a value strategy.”
Others believe it is just a matter of picking the right stocks.
Moustapha Mounah, an assistant portfolio manager with James Investment, has cut his energy stock exposure to 8% of his portfolio from 12%, while moving into software companies such as Abobe and Salesforce that he expects will be able to raise prices amid continued high inflation.
“The growth stocks that are really getting hurt are the speculative names, but there are many companies out there that will do well regardless of the cycle in the economy,” he said.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
/cloudfront-us-east-1.images.arcpublishing.com/tgam/LXOVIZNDDZITRMOXIB7SSD2E4Q.JPG)
