Equity Leadership May Shift

25 February 2022

This content is for professional investors only as defined by the MiFID.

Growth equities trounced the performance of value stocks over the 10-year period ended December 31, 2021, but last year and in the beginning of this year, many investors rotated out of higher growth companies. We believe the resulting value equity rally, however, may be heading for what has historically catapulted growth equities into a leadership role—Federal Reserve monetary tightening.

Rate Hikes Have Historically Supported Growth Equities

  • For the 10-year period ended December 31, 2021, the Russell 3000 Growth Index generated a 19.4% annualized return compared to the 12.9% return of the Russell 3000 Value Index. During 2021, investors rotated out of higher growth companies as interest rates rose and optimism about economic growth strengthened. With the exception of large cap, value equities substantially outperformed growth.
  • The Federal Reserve is expected to raise the Fed Funds rate several times this year. As illustrated above, value equities have historically outperformed from six months prior to the start of tightening to only three months afterward. As tightening continues, concerns that higher rates will weigh upon the economy prompt investors to favor less economically sensitive, secular growth companies, especially businesses that can potentially increase their sales and earnings with innovative products.
  • History is no guarantee of the future, but if this pattern repeats, growth equity relative outperformance could potentially accompany barbecuing, picnics and trips to vacation destinations this summer.

 

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