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.
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OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
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