Pandemic winners like Netflix drove Growth stocks higher this week, but longer term, we prefer to trade in Growth for Momentum.
Contributed by Doug Walters , Max Berkovich ,
It was a week for Growth stocks, as positive corporate earnings reminded investors that the pandemic has been positive for some companies, like Netflix, who saw their subscriber base grow as the world sought safe, at-home, entertainment. But we would caution against reliance on Growth stocks and would encourage investors to get to know Momentum… no they are not the same thing.
It may surprise you to know how “Growth” is defined in the investing world. Growth is synonymous with “expensive.” When we say Growth stocks outperformed, we are really saying that the most expensive stocks in the market outperformed. For example, the Russell 1000 Growth Index, a widely followed benchmark, is constructed using the more expensive half of the Russell 1000 Index. The other half of the index is termed “Value.” The assumption is that the more expensive companies have a higher price tag because investors expect them to Grow.
As evidence-based investors, the problem we have with Growth is that historically it has underperformed Value, and is thus not what we would term a proven and persistent “factor.” But Momentum is! Momentum captures segments of the market that are currently outperforming. At times this might be Growth, but it could also be Value or any other outperforming segment of the market. With Growth currently driven by a handful of increasingly expensive mega-cap stocks (Apple, Amazon, Microsoft, etc.), we see a good opportunity to swap Growth funds for Momentum. They offer similar exposure currently, but Momentum funds have the ability to rotate out of Growth should sentiment turn against them.
Headlines This Week
- To the relief of the markets, the Presidential inauguration went off without a hitch.
- The 46th President is signing a series of executive orders in the first week to combat COVID-19, including the establishment of mass vaccination sites, greater use of the Defense Act for vaccine production, ramping up of testing, and funding for FEMA for emergency supplies to reopen schools, to name just a few.
- Investor optimism remains high, and now it is time to see results.
The Relief Plan
- The President’s $1.9T relief package will not be without friction, as Senate Republicans object to the large price tag.
- There is no power-sharing agreement in the Senate yet, and filibustering could derail the package.
- The Senate must reach a deal on how they will organize themselves before the new administration can get anything through the chamber.
- Treasury Secretary nominee Yellen told Congress to “act big” on more relief, given the economic needs. Investors have been responding positively to the prospect of a big package.
- The emergency approval of the J&J and AstraZeneca candidates is likely just a few weeks away.
- Vaccine supply and distribution will be important in the coming months. Amazon has offered the President its help with distributing the vaccine.
- Daily deaths remain very high, but new cases appear to be falling, so the worst may soon be behind us.
Earnings & Economics
- Fourth-quarter corporate earnings are in full swing, with banks being the bulk of the early reporters.
- Banks that have reported have beaten estimates, giving investors hope for ongoing recovery.
- On the economic data front, the initial unemployment claims came in better than expected.
- Industrial production is continuing to improve while retail sales were sluggish in December.
is about 9% of U.S. gross domestic product (GDP)
The Week Ahead
It’s Fed Week!
The U.S Federal Reserve will have their first meeting of 2021 next week.
- The most important outcome of these meetings is the monetary policy statement used to gauge when the Fed will move to a tightening stance and under which conditions.
- Consensus among experts is that the Fed will leave rates unchanged and hold firm on their commitment to keep monetary policy accommodative.
- With the Biden administration requesting another $1.9 trillion in additional stimulus, investors will keep a close eye on how or when the Fed will take the foot off the gas to slow its monetary accommodation.
- Personal Consumption Expenditure Index (PCE) will be released for December on Friday, but after the Central Bank meeting. This is the Fed’s preferred inflation measure.
GDP Here, GDP There
Preliminary 2020 4th quarter Gross Domestic Product (GDP) numbers for the United States and a host of large European Countries will be released next week.
- Forecasts estimate an annualized increase of 4.4% in US GDP, a sharp decline from the strong rebound of 33.1% seen in Q3.
- On the optimistic front, the Atlanta Fed’s GDP model has Q4 growth estimated at 7.5%.
- Across the pond, Germany’s GDP numbers are set to grab some attention with a continuation of negative growth expected.
- Spain and France will also be releasing their numbers with both expected to be in negative territory, reinforcing the narrative of economic divergence between Europe and America.
All About the Tech
It is another busy earnings report week with large tech companies set to dominate the headlines.
- Microsoft (MSFT) will lead the charge reporting its earnings on Tuesday.
- Right behind them are Facebook (FB), Apple (AAPL), and Tesla (TSLA), reporting on Wednesday.
- After Tesla’s meteoric rise of 695% in 2020 and membership in the S&P 500, investors will have a keen eye to see if the company meets its earnings expectations.
- About a quarter of the S&P 500 is also reporting next week, including Boeing (BA), American Express (AXP), McDonald’s (MCD), and Johnson & Johnson (JNJ), to name a few big ones.
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