Listen, there are people asking if growth stocks are in a bubble.
And the thing is, the answer is “yes.” Unless of course you, like Citi, define “bubble” in dot-com/tulip mania terms.
You might recall that thanks in part to Goldman’s dramatic FAAMG call, tech suffered a pretty dramatic (well, “dramatic” is a relative term these days) selloff on June 9.
More specifically, growth had its worst day versus value since 2009. The relative underperformance was a three sigma event:
And while Citi wants you to know that we’re nowhere near levels seen during the run-up to the dot-com bust in terms of relative price and/or in terms of valuations…
…some folks are starting to get nervous about the potential for a dramatic downturn in growth stocks which, you’re reminded, have become increasingly correlated with momentum and volatility, raising the chances they’ll be sold indiscriminately/ systematically in the event of a panic.
Well on Tuesday Deutsche Bank’s own Binky Chadha (who at one point this year was the biggest bull on the Street) is out with his take and he’s got three reasons he thinks you should be long value over growth. Here they are…
Via Deutsche Bank
The post-election equity market rally has been characterized by large rotations, first into Value (15pp relative outperformance) then into Growth (15pp). These rotations ran deeper than just differing sector compositions, with sector neutral baskets displaying similar performance.
Value relative to Growth has been in a 15% band since 2010, with performance well correlated with cyclical growth indicators such as macro data surprises and with rates.
What’s next for relative performance? We see 3 reasons to be long Value over Growth here:
1. Value relative to growth is at the bottom of its band of the last 7 years. The bottom of the band held through the double-dip recession scare of 2010, the US debt downgrade in 2011 and the European financial crisis in 2012. It broke below only briefly during the early 2016 growth scare which followed a protracted period of slow growth after the dollar and oil shocks. So, at the bottom of the band here, the risk-reward looks asymmetric in favor of Value over Growth, with downside that looks limited and large potential relative upside of 15pp. What would be the catalysts for upside?
2. Macro data surprises are at the bottom of the range from which they have typically turned up. The relative performance of Value follows cyclical indicators of growth and a turn up in data surprises argues for being long Value over Growth. We see consensus economic forecasts muted following the recent period of negative data surprises, while we remain constructive on a pickup in the data in particular on capex spending and a pickup of the recovery in the labor market, both of which always lag broader recoveries in growth. We note in particular the very mixed data in the labor market presently with Nonfarm Payrolls (NFP) changes continuing to slow, while ADP payrolls have been recovering strongly and in line with the employment component of the ISMs. Year to date there is a large cumulative divergence between ADP and NFP payrolls of near 500k.
3. Rates are at the bottom of their 6-month range and we see the risk-reward as being in favor of higher rates. First, we expect macro data surprises to turn up which is supportive of higher yields. Second, we see the sharp declines in inflation over the last 3 months as reflecting idiosyncratic and temporary not macro factors. Third, we expect the drag on core inflation from the dollar’s past appreciation beginning to lift starting in the late summer and fall. Fourth, we see a Fed increasingly willing to hike rates and normalize its balance sheet. It’s most recent guidance for the next 2½ years is for 7 more rate hikes while the market is pricing in little more than 1 hike, indicating perhaps most clearly the risk reward. Fifth, positioning in bond futures has moved full circle, from the record net speculative shorts set in January all the way back to neutral. Sixth, after unusually strong inflows into fixed income year-to-date, we are now in a seasonally weak period.
Oh, and it’s probably worth noting that it looks like the iShares Core U.S. Growth ETF had its largest outflow on record yesterday…