When Will Large Growth Stocks Fall Out of Favor With Investors?
By David Royal
In last quarter’s magazine column, I observed that with a slowing economy, trillions of dollars of cash on the sidelines, and a massive injection of liquidity by the Federal Reserve, money was flowing into large growth company stocks, like Apple and Amazon. Investors are often willing to pay more for companies that can generate growth even in a tougher economic environment.
So, when will the market shift in favor of more economically sensitive stocks, such as manufacturers, banks and energy companies? The gap in valuation between “growth” and “value” stocks is historically wide, and I believe inflation could affect when investors might turn away from growth companies. Inflation has been running below the Fed’s 2% target for most of the past decade and, with the weakened economy, is unlikely to pick up in the short term. However, Fed asset purchases this year dwarf any and all “quantitative easing” during the global financial crisis of 2008 and thereafter. On top of Fed actions, we have trillions of dollars in deficit spending by the federal government. There is no meaningful precedent for the combined effect of this level of monetary and fiscal stimulus.
The question is whether at some point, with this amount of money in the system, the trends of the last decade could turn and inflation eventually becomes a systemic problem. If we were to see signs of broad-based inflation, investors would likely be less willing to pay for the earnings of growth companies far out into the future (which would be eaten away by inflation) and might then turn to less expensive value stocks, as well as “real assets” such as materials and real estate.
David Royal is chief investment officer at Thrivent.
The views expressed are as August 18, 2020, and may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product.
Asset management services are provided by Thrivent Asset Management, LLC, a registered investment adviser and subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.