A Resurgent U.S. Economy Shifts Equity Preferences | Lord Abbett
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Market View

We think the rebound paves the way for allocation opportunity between innovative growth and durable value equities.

Read time: 2 minutes

In a new report, “2021 Midyear Investment Outlook,” we encapsulate the views of a panel of Lord Abbett investment leaders on prospects for economies and markets in the second half of 2021. In this commentary, adapted in part from the report, Thomas O’Halloran, Partner and leader of the firm’s Innovation Growth Equity team, discusses the need to strategically adapt to changes in the investment environment and assess cyclical as well as secular growth opportunities. We urge you to read the full report (available here) or view a replay of a related webinar (registration required).

Room for Optimism within Innovation Growth and Durable Value

We’ve experienced a distinct rotation of equity preferences in 2021. The anticipated strong recovery in economic growth and corporate earnings produced a move toward cyclically sensitive sectors, while broad market averages have continued to climb. Investor optimism is certainly warranted, in our view, given the depth of uncertainty experienced last year and the exceptional speed of development and deployment of the COVID-19 vaccine.

Sectors that experienced a significant pullback due to the pandemic have bounced back this year. Conversely, capital shifting away from higher P/E (price-to-earnings) growth stocks toward economic recovery themes has pushed valuation ratios lower for many fundamentally-sound companies at a time when economic growth is accelerating, corporate earnings are rising, and optimism abounds. Inflation concerns have also played a role in diverting assets from longer-term growth names to more near-term cyclical opportunities. Figure 1 depicts the trajectory of key market segments in 2020-21.

 

Figure 1. 2020-2021: A Tale of Four Markets

Growth outperformed value in the first 10 months of 2020, while value has led following the vaccine announcements.

Source: S&P Global and FTSE Russell. Past performance is not a reliable indicator or guarantee of future results. The S&P 500 Index is widely regarded as the best single gauge of large-capitalization U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of the available market capitalization. The Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000® Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

However, we believe a reversion is likely, as valuations of innovative growth companies reach increasingly attractive levels. Recently, we have started to see the innovation growth stocks do better, as their corrections appear to be ending, with some even breaking out to new highs.

As mentioned earlier, we think there is room for optimism across innovative growth companies that enabled the economy to move forward during the pandemic and durable more cyclical value companies with competitive business models and solid track records for earnings and revenue growth. We are also encouraged by the policy and economic backdrop. We think investors have the U.S. Federal Reserve behind them with policymakers’ intentions to keep interest rates low.  On the economic front, we believe the U.S. government is also in investors’ corner, with fiscal expenditures coming that will help keep U.S. growth moving ahead. And you have strong corporate earnings, as many companies have come through the pandemic with flying colors. We believe that many of these companies continue to benefit from the technology revolution, which provides them with abundant digital resources that they can use to improve their businesses and expand their markets.

Looking further ahead into 2021, as Fed policy, rates, and inflation appear poised to normalize, we anticipate adapting our emphasis toward lasting, secular growth trends in innovation.

 

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

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

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

Equity Investing Risks

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.

Fixed Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

The credit quality of fixed income securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an  issuer’s creditworthiness.  Ratings range  from ‘AAA’ (highest) to ‘D’ (lowest).  Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

This material 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.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

Glossary Definitions

Price-to-earnings (P/E) Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.

The Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 2000® Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

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Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588) which is authorised and regulated by the Financial Conduct Authority.

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