The stock market's robust recovery from its March low has certainly come as a welcome surprise. And it's an important reminder of how difficult it is to predict the direction of the markets, even when the situation seems dire and obvious. Likewise, we don't want to guess if this market recovery is "real" and here to stay, or if it's simply an over correction.
As of Friday's market close, the S&P 500 has returned over 40% since it's March 23rd low point. Year-to-date the S&P 500 is just about back to even for the year. However, these stats alone do not tell the whole story. Let's take a closer look at the numbers to evaluate what's really been happening in the markets.
The market recovery has been a story of the haves and have nots. Stocks are generally classified into one of two camps: growth (more expensive) or value (less expensive). Growth stocks, as their name implies, typically have earnings that are growing at a faster rate than normal. Think Google, Amazon, Netflix, Facebook, and Microsoft. Growth stock's earnings are growing at a faster rate and their prices are higher because investors are willing to pay a premium for these stocks.
Value stocks, on the other hand, have earnings that grow at a slower rate but these earnings tend to be more consistent and reliable. Think Johnson & Johnson, Walmart, Procter & Gamble, Disney, and Bank of America. Value stocks are also usually the higher dividend payers of the two.
It may seem counterintuitive but over long periods of time, value stocks tend to out-perform growth stocks. But that has not been the case this year, or even this decade.
When we look closer at the current US market (all data as of June 5th, 2020), growth stocks are significantly outperforming value stocks. If we only examine large companies, growth stocks are up 10.1% year-to-date, while value stocks are down (9.1%). If we expand our view to mid-sized companies, growth stocks are up 6.6% and value stocks are down (13.8%). Small-sized companies show a similar trend but are collectively being hit the hardest: growth stocks are down (0.4%) and value is down (15.9%). And if we look globally, in general US stocks are doing better than the rest of the world.
No one really knows for sure why this disparity is happening. Normally in a market downturn, we would expect the relative stability of value stocks to be more attractive to investors. That clearly hasn't occurred in this market downturn.
So, while it may feel like the market is experiencing "irrational exuberance", this is not necessarily the case for any individual stock or category of the market. In any market, there are opportunities and they are often hiding in plain site. This market and this recovery are no different.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment, legal or tax advice. If you have any questions regarding this Blog Post, please contact us.