Thrivent's chief investment officer share his third-quarter views.
In my last column, I observed that at the beginning of an economic recovery, markets will often favor some of the riskiest assets, such as smaller, highly leveraged or unprofitable companies. We saw just such a “risk on” rally in the first few months of the year, punctuated by the phenomenon of so-called “meme” stocks. I suggested that as the economy enters what will hopefully be a prolonged expansion, investors would likely rotate into higher quality but still economically sensitive stocks.
We believe that the rate of growth in the U.S. economy likely peaked in the second quarter. We expect the economy to continue to grow at a solid clip, but the almost unprecedented rate of expansion we saw in the first half of the year as the economy reopened isn’t sustainable.
The correlation between growth and value stocks is currently near its historic low, with growth leading one day and value the next.
So how would we invest at this point in the economic cycle? In this “expansion” phase, it can be less clear which types of companies to favor. At the beginning of a recovery, markets generally favor economically sensitive “value” stocks. As the economy starts to slow, investors will pay more for companies that can generate growth, such as large technology stocks. The correlation between growth and value stocks is currently near its historic low, with growth leading one day and value the next. What I suspect we’ll see over the next couple quarters is the market assessing the pace and duration of the economic expansion, which is complicated by continued uncertainty around the pandemic.
Professional management can be especially important during this phase of the economic cycle, in which picking good companies, as opposed to making big bets on factors such as growth or value, can be paramount. As always, your Thrivent financial advisor is there to help you.
David Royal is chief investment officer at Thrivent.
