New month? New market.
The S&P 500 is sitting less than 1% from record highs, thanks in part to a 3.1% climb month-to-date in August. The sharp move higher is a bit unusual for the dog days of summer. In fact, it’s the S&P 500’s best start to August since 1996.
But believe it or not, this isn’t another “tech leading the market” take. The FAANG stocks have actually stepped out of the spotlight this month. Instead, economically driven value stocks are rising from the ashes after being overlooked for most of this rally. Signs of fear are beginning to fade in other markets, with Treasury yields perking up from record lows.
The market feels a little bit different these days, and honestly, we’re digging this new vibe.
It’s no secret that “growth” stocks, or sectors with high-flying returns and risk (like tech, consumer discretionary, and communication services), have been carrying the market for most of this recovery. Stocks have recovered at one of the fastest paces in history, but many have been concerned that tech’s dominance would lead to a top-heavy market prone to toppling over. It was also odd to see such a strong market rebound with so few stocks moving higher. We wanted to see more participation in the rally before believing stocks could definitively reach new highs.
Then, we flipped the calendar to August, and other parts of the market stepped up:
- Industrial stocks, or manufacturers of goods and supplies, have risen 7.6% to take the top spot this month.
- Transportation stocks, or companies in the business of getting things from one place to another, notched 11 straight days of gains, its longest streak since March 2010 (the first year of the last economic expansion). Transports’ strength could be a leading indicator, or a sign of higher economic growth ahead.
- Energy stocks, the hardest hit shares during the selloff, are up 4.5% and heading for their first monthly gain since March. If consumer activity picks up, there could be more demand for oil.
- Financial stocks, including banks and insurance companies, have climbed to their highest levels since June.
This group of industries, among others, are often referred to as “value” stocks because they tend to grow at a slower, steadier rate. Value stocks also rely more on an improving economy to make money. Sure, that doesn’t sound as exciting as tech stocks, but they can play an important role in your investing journey.
Value stocks tend to thrive when yields rise and inflation picks up, two trends that typically happen in the early innings of an economic recovery. Investor confidence also matters – if you believe the recession is over, you’re probably more comfortable putting your money in companies whose success depends on where the economy is going.
Just look at value’s track record in the past. In the 12 months after the end of the Great Financial Crisis (March 2009), value stocks soared 77%, while growth stocks rose 69%. Same deal in the early 2000s: In the year after the market bottomed (in October 2002), value stocks jumped 38% and growth stocks rose 36%.
We think we’re in an economic expansion right now, even though it may take a while to get back to where the economy was before the pandemic. If that’s the case, value could be ripe for a comeback.
Does the move stick?
Value stocks are the new vibe. But will this vibe stick around? Things change quickly these days, after all.
So far, so good. The S&P 500 is eyeing a record high, which could be a huge psychological milestone for the market. The 10-year yield is moving higher, too, showing that investors feel OK enough with the future to let go of bonds (yields go up when bond prices go down). Gold, which can be used as a safe haven in times of uncertainty, has dropped from a record high.
We shouldn’t get ahead of ourselves, though. This could be the market’s reaction to coronavirus hotspots simmering down a little. We’re also waiting on another round of government aid, which could be crucial for the economy’s (and value stocks’) success.
Stocks’ future path could still be dependent on the pandemic and how well policymakers respond to it. That said, a viable treatment or vaccine for the virus would be a game changer.
It’s difficult to guess when that treatment or vaccine will arrive. It feels like the whole market is playing that guessing game, doesn’t it? But when we do find a way out of this pandemic, we think the economic recovery could pick up speed and carry value stocks along with it.
It’s a vibe.
We believe growth stocks, like tech, still have a lot of long-term potential. While interest rates will likely move higher, we expect them to stay historically low, and that’s good for high-flying stocks. But contrary to what you might hear, it’s not a this-or-that situation. Growth stocks and value stocks can both do well at the same time (just look at that second chart).
Recent performance from value has been encouraging. It may take time for the group to build a sustained lead over growth, but we’re happy to see higher stock participation in the rally. And given the possibility for a vaccine, we believe beaten-down value stocks may be worth a look.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.