The perpetual debate of whether investors should weight their portfolios toward growth or value stocks rages on every day the market is open.
Both the bond and stock markets hang on every economic data point to bolster the case for both views, with algo-models fueling fierce sector rotation like neon fish in an aquarium darting back and forth and from side to side when someone taps on the tank.
For the market, that someone is the Fed, because very little else that would normally wallop investor sentiment isn’t even putting a chink in the market’s armor. Investors don’t appear to be fazed by the news that President Biden signed executive orders aimed at increasing competition in the railroad, banking, transportation, health care, agriculture and technology industries.
The reaction to high-profile cyberattacks among market participants has been surprisingly complacent. Russia-linked group REvil infected thousands of victims in at least 17 countries via software company Kaseya, demanding $70 million to unlock computers in what is the biggest ransomware attack on record.
Adding to the Teflon market action, investors don’t seem to be concerned by ongoing reports discussing the spread of the COVID-19 Delta variant. While Asian markets have been caught up more in that concern, the U.S. stock market has proved resilient, content that that there aren’t any moves to impose new restrictions and that the Pfizer, Moderna and J&J vaccines have robust efficacy against severe illness and hospitalization.
Last Thursday, both the Centers for Disease Control and Prevention (CDC) and the Food and Drug Administration (FDA) have said fully vaccinated Americans don’t need a booster shot under development by Pfizer at this time to treat the Delta virus variant. With this assurance in hand, investors moved Friday, July 9, to put cash to work. The latest data for U.S. vaccinations show about half the country has been fully vaccinated.
So, while the United States might be in a safer situation against the risk of a new deadly variant spread, San Francisco Fed President Mary Daly (a voting member) pointed to the Delta variant as a global recovery risk and reportedly said the Fed should be cautious about withdrawing its policy support.
“I think one of the biggest risks to our global growth going forward is that we prematurely declare victory on COVID,” Daly said.
She said countries around the world need to increase their vaccination rates, or COVID could continue to spread and act as a “headwind” on U.S. growth. This commentary from Ms. Daly was music to the bullish camp’s ears seeking further reasons to buy stocks and for shorts to run for cover, pushing the S&P 500 to another all-time high.
Speaking of Fed policy, this is a big week for the central bank. Fed Chair Powell will provide testimony July 14-15 to Congress, outlining the Semiannual Monetary Policy Report, which was released last Friday and bolstered the day’s rally. Mr. Powell’s testimony will be a focal point next week along with the start of the second-quarter earnings reporting season.
In what is a most interesting development, last Friday’s session saw broad participation from almost all market sectors, briefly putting to rest the need to be right or wrong about the value versus growth trade. It is beginning to look as if both views will be right in terms of future performance. Liquidity for stocks is through the roof. The Wall Street Journal reported retail investors poured $28 billion into stocks and exchange-traded funds (ETFs) during the month of June, the highest monthly amount deployed since 2014.
It appears that there is plenty of money to go around to facilitate strong gains for both growth and value stocks, regardless of opinion. The radical move lower in long-dated Treasury yields was given up to more of a technical and short-covering move that fueled the growth stocks higher. At the same time, prices of crude, gasoline, heating oil, natural gas, corn, soybeans, cattle, coffee, sugar, cotton, iron ore, hot rolled steel and aluminum are up on the year, but came off their highs in the past month.
No question, there are current inflationary pressures in both hard and soft commodities along with all manner of household services, labor, medical, education, vocational training, travel and entertainment expenses. Inflation data for June is out this week.
The market is having its cake and eating it too. Bond prices are down, the dollar is holding firm, the second quarter had 113 initial public offerings (IPOs) raise $39.9 billion, the most active quarter since 2000, and there is estimated to be around $3 trillion sitting on the sidelines with central banks showing no signs of slowing the priming of the quantitative easing (QE) pump.
The Fed will have the luxury of receiving the June inflation data and a plethora of other economic data before the next Federal Open Market Committee (FOMC) meeting slated for July 28. Between now and then, there is a growing case for a broad-based rally to include all of growth, value and everything in between, at least through earnings season when forward corporate guidance will sort out the second-half winners and losers. Until then, it looks like “everyone in the pool!”