Navigating the Economic Slowdown and “Growth” Market Momentum
Despite the looming recession and potential U.S. default, investor sentiment continues to be noticeably positive. As of yesterday’s market close, the S&P 500 has bounced back slightly more than 50% from its decline since January 2022. Furthermore, the trading volume for Nasdaq 100 call options saw its highest mark since 2014. Yet, this bullish outlook in growth stocks is seemingly disconnected from the more pessimistic economic data. This week new data revealed that U.S. consumer confidence in April dipped to a nine-month low due to fears of an impending recession.
The S&P 500’s rebound from a significant downturn suggests that a recession may not be as imminent as feared. This resilience is partially attributed to a corporate earnings season that has, by and large, surpassed expectations. Propelled by robust earnings reports, cost cutting, and enthusiasm for innovative trends in AI, investors have been reallocating towards growth stocks. It’s worth noting that value stocks have underperformed, seeing little to no investor demand. For instance, the Vanguard Value Index has slipped -1.33% this year. Additionally, dividend-paying ETFs like the Schwab US Dividend Equity ETF have performed even worse, falling by -5.75% this year. Consequently, growth stocks have become pricier, while the inexpensive stocks lack buyers. This situation seems eerily similar to 2021, with such a marked disparity between growth and value stocks. I expect these stocks will eventually return to their means, much like they did in 2022. However, I don’t foresee this trend changing in the near future. I also prefer buying and owning growth stocks at a discount, but these stocks are anything but cheap.
The decline in consumer confidence is visibly impacting the retail sector. Walmart CEO, Doug McMillon, stated on Tuesday that inflation is creating strain among American consumers, with effects varying across product categories. He noted that consumers are prioritizing their purchases, sacrificing certain electronics in favor of essentials. For pricier items like TVs, they are holding out for sales, and cutting back on their apparel and home goods shopping. In a similar vein, Target’s recent earnings report echoed these observations. “American consumers grapple with difficult choices, juggling family wants and needs,” shared Chief Growth Officer Christina Hennington during a post-earnings call, “The looming threat of a potential recession is a major concern for many American families.” Despite the note of caution, both Walmart and Target have actually increased their yearly guidance, thanks in large part to successful cost-cutting measures and improved inventory management. This helps to explain the scenario we are seeing played out across the economy which is the economic data isn’t so hot but investors are still upbeat.
In the weeks ahead, we can expect the focus to shift from earnings reports back to politics. Likely, the politicians will need to come together and delay this major debt issue, with both sides proclaiming victory in the final hour. Once this crisis is averted, investors will shift there attention back to problems like slowing economic growth, stubborn inflation, or a potential recession. Inflation continues to be a wildcard, and considering the Fed’s data-driven stance, the market’s reactions to economic updates will be key. Personally, I don’t rely too heavily on frequently revised government economic reports, as they often provide an incomplete picture of the economy’s health. I find it more useful to listen to management discussions and see what is happening at the business level.
We’re seeing a market situation reminiscent of 2021, with an economy that’s underperforming and growth stocks carrying the day. Yet, there’s a compelling case beginning to take shape for those keeping a watchful eye on overlooked value stocks, which may eventually swing back into favor. The timing of this shift is more likely to coincide with the Federal Reserve’s interest rate cuts, given that going against the Fed’s actions has traditionally been an unprofitable strategy for investors.
