During the course of 2021, vaccination efforts mixed with cash injections have helped the economic recovery along.
While the economy continues to need support, the slow return to an open economy had been pushing traders in a new direction, the reflation trade.
The reflation trade was a move by investors based on growing confidence in the economic recovery and a belief that the worst of the pandemic is in the past.
This saw investors ditch the growth stocks, primarily tech companies that helped foster a work-from-home reality as well as more speculative plays in things like electric vehicles. In their place investors bought shares in companies that typically have physical products and/or brick and mortar locations. Another way of thinking about who these companies are is to just think about the companies that closed during the pandemic and didn’t help you work remotely. That isn’t all inclusive, some brick and mortar companies, such as Walmart (WMT) and Home Depot (HD), soared during the pandemic, but many others fell flat.
Despite how robust and clear the market was that it was pivoting from growth to value, recent trends have shown a slight step back.
May 12, 2021 was a decidedly bad day for markets, as the Nasdaq, S&P 500, Dow, and the Russell 2000 all finished lower at a trough that represents each of the indices lowest point since early April.
Pre-May 12Leading into the May 12 inflection point, the S&P 500 had increased 9.79% since the turn of the year, while the Dow added 11.13%, the Nasdaq added 2.62%, and the Russell 2000 rose 9.72%. To gain a more focused look at how stocks were trading during those months, we also looked at the Vanguard Value ETF and the Vanguard Growth ETF, and the former added 16.37% while the latter puttered along with just 3.22% growth.
So during this time, the tech-heavy Nasdaq and the Growth ETF drastically underperformed the market. Meanwhile, the small-cap Russell 2000 performed in-line with the market and the Value ETF soared.
Post-MayAfter May 12, stocks started singing a different tune. The S&P 500 has risen 4.07% from May 12 to June 8, while the Dow added 3.13%, the Nasdaq climbed 9.62%, and the Russell 2000 jumped 9.95%. Meanwhile, the Value ETF has added 3.01%, while the Growth ETF gained 5.7%.
So after our inflection point, the Value ETF has underperformed by about a percentage point, while the Growth ETF did the opposite and outperformed by about the same amount. Meanwhile, the Nasdaq and Russell 2000 outperformed by quite a bit.
So Why Did We Go Back to Growth?This could be investors starting to feel like they are returning to normal. During the before times, investors actually had diversified portfolios that spanned across sectors and business models to help them grow their portfolio.
However, during both the worst of the pandemic and through some of the earlier stages of the recovery, stock picking became a rather mundane ordeal at times. Netflix (NFLX), DraftKings (DKNG), and Microsoft (MSFT) ripped, while oil & gas, banks, and retailers all struggled, with those roles reversing once the reflation trade gained favor.
So if markets are forward looking, and with some drunk people in Vegas are already declaring Covid to be over, there are surely investors out there saying the growth vs value phases are done and that it's time to beat the market to the next play, and they may have seen the drop on May 12 as the perfect time to begin that transition.
This seems more like a return to "normal", so the growth stocks would outperform while the values would work to hedge your portfolio from taking on too much risk, which of course would be at the cost of some potential growth. But both can be good investments and neither are rendered useless by unforeseeable circumstances.
This doesn't seems like a reversal of the earlier move from growth to value as much as an entirely new phase of the recovery.
Since May 12, the riskier bets outperformed the market, plain and simple. The tech and small cap stocks swung higher while the value stocks followed the market higher, but at a slower pace. This is how stocks trade in non-pandemic times and seems like yet another sign of things getting close to normal.