Innovation Investing through the Current Market Rotation | Lord Abbett
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Market View

Which areas of innovation may be best positioned during the current market shift?

Read time: 3 minutes

In a previous Market View, we explored the recent equity market rotation and how it related to what we view as three, broader, secular stock market themes: innovation, vulnerability, and durability. Here, we will zero in on the first part of the equity troika—innovation—and how Lord Abbett investment teams have been adapting to this current market environment.

As a result of the increasingly successful vaccine rollout and a powerful economic recovery, the rapid expansion of business and consumer spending related to the reopening of the U.S. economy and associated inflation uncertainty have dramatically changed preferences and behaviors among equity investors, while leaving the overall level of major stock averages little changed.  We have seen three key shifts that are impacting innovation-oriented stocks:

  1. Purge of speculative excesses. Rising risk aversion is working off numerous speculative excesses related to day trading, speculative buying into Special Purpose Acquisition Companies (SPACs), and cryptocurrency trading.
  2. Preference for economic sensitivity. Capital is flowing to shorter-duration equities, i.e., those most likely to experience inflection today as the result of the economic re-opening. This group includes value stocks that were hit hard by Covid-19 but are bouncing back dramatically; traditional cyclicals like banks, energy, and industrials; and cyclical growth stocks like semiconductors that are seeing strong demand growth.
  3. Multiple contraction. As a result of the shifts in capital away from stocks with higher price-to-earnings (P/E) ratios and into rapidly recovering names, combined with booming corporate earnings growth, we are starting to see P/E multiples retreat at a time of rising optimism about the economy and corporate earnings. In our view, this is typically not a sustainable combination, and this rotation will likely overshoot meaningfully just on sentiment, while fundamentally strong, accelerating growth companies see their valuations reach attractive, multi-year lows.

Responding to a Changing Dynamic
Since “vaccine day”—November 9, 2020, when the Pfizer-BioNTech COVID-19 inoculation showed stunning efficacy—our innovation equity team has been making shifts in our portfolios to adapt to the changing market environment. Furthermore, after the Georgia runoff election in the U.S. reversed the premise of divided government and confirmed a Democratic voting majority in the U.S. Senate, the policy environment changed substantially, particularly around the magnitude of federal stimulus spending. That event caused us to adapt further. As a result, we changed our emphasis in our key sectors away from secular growth names to more economically-sensitive areas of the economy:

 

Innovation Adaptation
How Lord Abbett’s Innovation Investing team has responded to the recent stock market rotation

Source: Lord Abbett. Information as of June 4, 2021. For illustrative purposes only.

 

Looking Ahead

We have shifted our emphasis in certain sectors to adapt to the current environment as we progress through this period. There is an enormous amount of fiscal and monetary stimulus in the U.S. economy, accelerating a reopening-fueled expansion that was already in progress. However, while the fiscal stimulus will have a meaningful stimulative effect in the near term, we think the combined influence of:

  • potentially higher taxes in 2022
  • the economic drag of a $30 trillion U.S. national debt
  • a declining population growth rate
  • the disruptive effect of innovation on many vulnerable industries in the economy
  • continued geopolitical risks, primarily from China, Russia, and cyberterrorism

will likely offset the near-term “supply shock” we are experiencing, as well as this year’s ”the pandemic is over” summer spending binge. So, while U.S. interest rates may very well rise from here, we believe there are some noteworthy forces that should keep them in a manageable range for the foreseeable future. This, in our view, should continue to create a favorable backdrop for innovation-oriented equities for the longer term.

Lastly, we know that the stock market discounts the future. As equity investors continue to price in significantly higher inflation, when we finally do get to that point where price increases level off (or fall off), U.S. Federal Reserve (Fed) policy adapts, and short-term rates rise to historically normal levels, the market may once again start to appreciate the secular growth inherent in innovation. Where might that growth come from? In all likelihood, a continuation of the massive secular trends that have been under way in recent years, i.e.,  the genomics revolution, the dominant e-commerce and streaming technologies, the rapid evolution of artificial intelligence, robotics, blockchain, electric and autonomous vehicles, and more. The tech revolution is still young; we think recent pullbacks in these areas of innovation represent a brief detour from their potential path to long-term gains. 

 

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.

No investing strategy can overcome all market volatility or guarantee future results. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

Glossary Definitions

A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.

Growth/Value Investing: Growth stocks may be characterized as equities of companies that have demonstrated better-than-average gains in earnings in recent years, and that are expected to continue delivering high levels of profit growth. Growth equities typically carry higher price-to-earnings multiples than the broader market, high earnings-growth records, and greater volatility than broader market. Value stocks may be characterized as equities of companies that have fallen out of favor with investors but still have good fundamentals, or new companies that have yet to be recognized by investors. Value stocks typically feature lower price-to-earnings multiples than the broader market—and often their industry peers—and somewhat lower volatility than the overall equity market.

Price-earnings ratio is the valuation ratio of a company's current share price compared to its per-share earnings. It is sometimes referred to as “price multiple” because it shows how much investors are willing to pay per dollar of earnings.

A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering for the purpose of acquiring an existing company. 

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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