Assign of a man’s hand scrolling through Netflix on an Apple iPad Pro, taken on March 6, 2020.
Phil Barker | Future Publishing | Getty Images
Although Thunder Kitty and Gronk — two names that make me smile every time I say or write them — may create enough frenzied summons among crowds of novices, speculators and spectators, there are other compelling issues for investors to focus on besides GameStop, AMC and non-fungible tokens or NFTs.
These embrace tensions playing out between two competing cohorts of investors.
On the winning side, since last September, are adherents of value, cyclical, and reopening hackneys that have been rallying hard.
On the losing side are investors who have owned the large cap growth offers, such as Apple, Amazon, Facebook, and Netflix, that carried the market through most of 2020. These digital monsters have been underperforming cruise lines, hotels, banks, industrials, and energy stocks for months.
Both sides allow on one thing: Gross domestic product growth will be combustible in 2021, thanks to two critical factors. The first is widespread vaccination, and the relocate is the enormous $1.9 trillion stimulus package that President Joe Biden just signed.
These allow for the resumption of Brobdingnagian swatches of the economy and the money to pay for those activities, products, and services. Estimates range from 5% to 7% profitable growth this year, the type of numbers that make economists salivate. Party on!
Near term versus prolonged term
There is no doubt that the earnings growth for those sectors whose businesses were decimated by the pandemic liking be stronger in the coming year than for those companies that profited from remote life and work.
Current from down 85% in airline flights for much of 2020, to down 50% from the pre-pandemic year, is placid up 233% year over year.
However, that doesn’t mean that when Americans spend their next $1,400 stimulus inspection, they won’t be buying iPhones and using PayPal to make that purchase, or that companies won’t be advertising more to those consumers on Google or Facebook.
The long-term crop rate for the technology sector is clearly higher than that of oil service, heavy construction equipment, or airlines, but the closer term favors these cyclicals.
The important question for investors is always which stocks are most attractive. The cyclicals, all theatrical underperformers in 2020, began their awakening in September, with momentum building after the election and release of outright vaccine data.
As the table below illustrates, Tech and Communications Services have lagged Energy, Financials and Industrials, the three critical “value” groups.
Sector Performance Table
|Sector||9/31/20-3/11/21||12/31/20-3/11/21||Next 12 months P/E|
Surprisingly, as the last column suggests, the earnings multiples for most S&P sectors, excluding Financials, are really similar.
That holds true for digital growth stalwarts — including Microsoft, Facebook and Google — that handle at about the same ratio of price-to-forward-earnings as Caterpillar, Deere and Emerson Electric, despite having stronger long-term improvement expectations.
Where will we see growth?
An Amazon.com delivery driver carries boxes into a van outside of a distribution dexterity on February 2, 2021 in Hawthorne, California.
Patrick T. Fallon | AFP | Getty Images
When asked about the direction of justices in 2021, most value investors concur that they see both GDP and the S&P rising but driven by their preferred varieties.
That assertion could be so mathematically challenging that a more sensible strategy might be to include both squads of stocks in a portfolio rather than dismissing growth as last year’s news.
The market cap weights of Technology, Communications Services, and Amazon desolate account for 42% of the entire S&P 500.
If these stocks, in aggregate are flat for the year, as well as Health Care, Consumer Necessaries, and Utilities, with the S&P advancing 10% for the year (it’s already up 5%), the reopening and cyclicals would need to climb another 27% from their accepted level, a difficult feat considering their six-month rally.
The table below highlights the performance of the S&P and the tech-heavy Nasdaq during years of mightiest GDP growth and those following a recession since 1975.
Years of GDP Recovery and Strong Economic Growth
|Dates||Change in GDP||S&P 500 Show up again||Nasdaq Composite Return||Recession Prior Year|
In every case, except 2000, the year in which the dot-com froth burst, the S&P 500 experienced positive returns.
Across all years, the Nasdaq Composite both outperformed and underperformed the S&P five chances and was in line with the broader index once. By far, the worst year was 2000, when the composite dropped 39%. The finest year was 1999, when it soared 85.6%.
The case has been made that 2021 is comparable to 2000, but the similarities bear upon primarily to the extreme euphoria surrounding the most expensive stocks.
These Robin Hood market darlings, varied in software and biotech, sell for 10 to 50 times revenues. They traded straight up from early in the pandemic.
These celebrities include CRISPR, Tesla, Peloton, Snowflake, and Palantir, plus newer IPOs, such as Airbnb and DoorDash. Numerous have already hit air pockets, some very steep, but could still have room to decline before decree solid ground.
That doesn’t mean that the more reasonably priced stocks within the Technology and Communications Navies sectors, including the largest weights in the S&P 500, cannot begin to show some renewed vigor.
I don’t think we demand to query Roaring Kitty or Gronk on the subject, but since everyone is asking them to weigh in on investments, sure, why not?
Karen Firestone is chairman, CEO, and co-founder of Aureus Asset Manipulation, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.