Positioning Implications
As the economy fully opens and economic growth potentially accelerates more than we had previously anticipated, we believe the macroeconomic environment for value stocks may continue to improve.
Growth stocks have had a tremendous run over the past decade—accentuated by the “stay-at-home / work-from-home” environment during the pandemic that gave many growth-style stocks an earnings boost. But over the past several months as vaccines have been approved (with more likely on the way), more stimulus arrived (also more potentially on the way) and investors gained more confidence in the reopening, value stocks have performed better. As a result, we are squaring up our views of growth and value. Strong growth-style fundamentals and our positive view of the technology sector keep us from a negative view of growth.
A stronger and fully open economy is also supportive of small cap stocks. We upgraded our view of small caps to neutral in September 2020 and continue to have a positive bias. The earnings recovery in smaller companies since last summer has been even more impressive than that of their larger counterparts.
From a sector perspective, stronger growth may bring more demand for energy globally. In addition, recent comments from OPEC + Russia suggest production increases may be quite gradual and could help provide support for oil prices which have already made a big move, gaining $20 in just the past 3 months to near $57 per barrel for WTI crude.
Conclusion
Our confidence in a full economic recovery is growing. A fully reopened economy is closer to becoming a reality on a combination of falling Covid-19 cases and hospitalizations, better treatments, more than a million shots going in people’s arms each day, and the resilience of the U.S. consumer and businesses—both large and small—to power through the immense challenges the pandemic has presented. Plus massive fiscal stimulus likely to exceed 20% of U.S. GDP and a Federal Reserve that is expected to remain supportive for the foreseeable future further solidify the bull case.
But the battle against Covid-19 isn’t over unfortunately. New, more infectious variants of Covid-19 are out there. The vaccine rollout will take time, and there will be holdouts. Consumer behavior may be slower to return to normal than we might expect. We see these risks as manageable at this point and believe the market will continue to look forward to life on the other side of the pandemic.
Jeffrey Buchbinder, CFA, is an equity strategist at LPL Financial.