After a screaming hot run for growth stocks off the pandemic-led economic and stock disruptions of March 2020, value investing made an impressive comeback in 2021. This has thrown equity managers for a loop, with only 40% of U.S. equity managers managing to outperform the S&P 500 Index this year. Goodreid adopted a barbell approach to style investing in early 2020, noting that trying to predict style dominance would be very difficult. This approach has rewarded us this year, as we are ahead of the S&P by approximately 3% YTD.
The graph below highlights the extreme levels of dominance of growth investing in 2020. For context, on the far left of this graph, the building of the internet bubble of the late 1990s can be seen. Growth stock dominance was extreme and when the internet stock bubble burst in 2000, value investing trounced growth. The magnitude of growth dominance in 2020 is evident by the comparison to the internet stock bubble that few investors will forget.
Where do we go from here? As the graph shows, recent stock action is once again favouring growth. Is the market telling us that the inflation scare is a head fake? We think that is possible (even as central banks are buying into the inflation story by removing the word “transitory”). Regardless we will continue to employ our strategy of hedging our bets regarding style.
For 2022, watch two things; the Federal Reserve and corporate profits. If inflation persists and the Fed raises rates more than 2 times during the year, expect our cyclical holdings to dominate (GM, FCX, Bank holdings). Conversely if inflation settles down and the Fed is less aggressive, our growth stock holdings will lead (AAPL, GOOG, FB, AMZN). All the while, keep a keen eye on corporate earnings, which we expect to rise for the S&P 500 by 10% in 2022, after rising 25% between Dec 2019 and Dec 2021.
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