Need to Know: There’s one reason big growth stocks have outperformed over the last decade — and that’s about to change, strategist says

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Since Pfizer first announced that its COVID-19 vaccine was effective, there has been a clear shift in financial markets toward the sectors hardest hit by the pandemic, and away from the technology titans that have thrived in the stay-at-home environment.

Index Nov. 9 Month of November
S&P 500 growth -0.58% 9.58%
S&P 500 value 3.98% 12.59%
Russell 2000 3.70% 18.29%
MSCI Emerging Markets 1.00% 7.73%
Source: Leuthold Group

Scott Opsal, director of equities for Leuthold Weeden Capital Management in Minneapolis, says value, small-caps and emerging markets share similar characteristics as anti-large growth rotation plays.

“a) Each is pro-cyclical, benefiting from an upswing in business activity, b) Each tend to perform better during periods of widespread earnings growth, c) Each has a lower exposure to secular growers and is less populated by companies known for strong profitability and high quality, d) Each is priced at a substantial discount to [large-company growth] today.”

Since 2008, the Russell 2000 RUT, +1.08%, S&P 500 value index SP500PV, -0.12%, and MSCI emerging markets index 891800, -0.07% have generally moved in lockstep. Over the last decade — from Nov. 30, 2010 to Nov. 30, 2020 — the S&P 500 value index has gained 190%, and the Russell 2000 has gained 187%. Of course, those nearly identical performances have been trounced by S&P 500 growth SP500PG, +0.25%, which has surged 365%.

Right now, he says, on valuation measures such as price-to-earnings, price-to-sales, and price-to-cash flow, the difference between large-cap growth and the three other asset classes are in the 87th to 99th percentiles.

One notable finding is that, since 2003, large-cap growth stocks outperform when the economy is struggling. He looked at nominal gross domestic product growth, which is real GDP plus inflation. Growth’s trailing 12-month returns outpace each style by 4% to 5% during periods when nominal GDP growth is under 4%, but there is no advantage at all when growth is above that level, and in fact emerging markets outperform by nearly 6% when nominal growth is above 4%.

Average 12-month return spread since 2003
Nominal GDP growth <4% Nominal GDP growth >4%
Growth minus value 4.9% 0.0%
Growth minus small cap 3.9% -1.0%
Growth minus emerging markets 4.3% -5.9%
Source: Leuthold Group

In an email, Opsal said investors, particularly those that remain heavily exposed to the growth style, should be gradually rotating toward these cyclical plays. He said the Leuthold Core Fund has increased its weighting of industrials and consumer durables to benefit from a cyclical value rotation. He also said its global tactical managed exchange-traded fund strategy has added ETFs in the industrial and materials sectors, and purchased small-cap and equally-weighted ETFs to capture the undervaluation of small-cap stocks.

The buzz

The COVID-19 vaccine made by drug company Pfizer PFE, -0.29% and its partner BioNTech BNTX, +5.48% received the endorsement of an advisory panel, setting the stage for the Food and Drug Administration to approve the treatment on an emergency basis as early as Friday.

Not all the vaccine news was positive — GlaxoSmithKline GSK, +0.34% and Sanofi SNY, +0.26% said their vaccine triggered an insufficient response in older adults, so it is going to be delayed until the fourth quarter of 2021 as they seek to improve it. Australian researchers and the government agreed not to proceed further with the vaccine made by the University of Queensland and biopharmaceutical company CSL CSL, -3.24%, because of the false positive HIV results it triggered.

U.S. stimulus talks are getting bogged down again, according to Politico, after recent momentum. European Union leaders, however, seem on the path to securing their budget deal, even as they struggle to reach a trade deal with the U.K., with both U.K. Prime Minister Boris Johnson and European Commission President Ursula von der Leyen saying no deal was more likely ahead of their Sunday deadline.

Walt Disney Co. DIS, +0.17% shares jumped in early premarket action, as the media and entertainment giant said a slate of big-budget movies will open on its burgeoning streaming service and in theaters as part of a direct-to-consumer push, and it set out plans for 10 new Marvel series and 10 new “Star Wars” series. Its Disney+ streaming service had 86.8 million paid subscribers as of Dec. 2. 

Swedish telecommunications-equipment vendor Ericsson ERIC, -0.41% warned that “current geopolitical conditions” are impacting handset sales volumes, as is the shift from 4G to 5G handsets. It also sued Samsung Electronics 005930, +0.69% for royalties.

The market

U.S. stock futures ES00, -0.87% NQ00, -0.87% were pointing to a rough start, with futures on the Dow industrials YM00, -0.78% down more than 200 points.

The U.S. dollar DXY, +0.21% rose, while the yield on the 10-year Treasury TMUBMUSD10Y, 0.887% was 0.88%.

The pound GBPUSD, -0.85%, which neared $1.35 on Wednesday, fell below $1.32 on the U.K.-EU trade fears.

Chart of the day

Berenberg Bank has produced this chart of surging global shipping costs. It reflects disrupted supply chains, and various COVID-19 restrictions mean that it takes longer to process containers and distribute the goods. The construction industry, and those producing sophisticated durable goods, could see delays. It might not impact consumer prices much — a Kansas City Federal Reserve study in 2016 found that a 15% increase in shipping costs leads to a 0.1 percentage point rise in core inflation after one year, and that was at a time when demand was much stronger.

Random reads

Time magazine awarded its Person of the Year to two people, President-elect Joe Biden and Vice President-elect Kamala Harris.

A new species of whale was found off the coast of Mexico.

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