The last time investors were as bearish on value stocks as they currently are was December 2007, just before the Great Financial Crisis of 2008. That’s according to data from Bank of America Global Research.
The S&P 500 is up 32% since March 23, but the rally has been led by growth stocks, which usually do well when sentiment is bearish. Growth stocks, often invasive tech companies, sometimes have industry growth drivers that aren’t sensitive to changes in economic growth and can power through headwinds, while more cyclical sectors see sales and earnings slow or decline.
The rally in growth is not to say value has done poorly; bullishness on a strong economic recovery clearly exists somewhere in the market. But the combination of growth outperformance and current investor positioning shows bearishness on the speed of economic recovery and stocks.
Bank of America’s data shows that a net negative 23% of fund managers surveyed by the bank think value will outperform growth in the near future, meaning more investors think value will soon underperform. Usually, most investors see value outperforming. The last time the ratio was close to this negative was December 2007, about 10 months before the financial crisis occurred, when the ratio was a bit more than negative 30%.
And this year, the Vanguard S&P 500 Value ETF (VOOV) is up 29.5% since March 23, as investors have indeed priced in an economic recovery close to a V-shaped one. But in that time, the Vanguard S&P 500 Growth ETF (VOOG) is up 36%, as investors have found some form of safety in growth.
Year-to-date value and growth look like this:
- Value: -18.5%
- Growth: +1.3%
Facebook (FB) , Apple (AAPL) , Amazon (AMZN) , Netflix (NFLX) , Google (GOOGL) and Microsoft (MSFT) have all eked out gains for the year. Investors still expect a strong multi-year 5G hardware cycle soon, benefiting Apple. Apple’s move into services is also supporting its rich earnings multiple. Amazon’s one-day delivery for e-commerce and its cloud business are both booming. Microsoft’s cloud business is superior. Google’s search business is decelerating, but it’s still a strong earnings grower and its cloud business is becoming competitive. Netflix is still king of content in the global growth market of streaming, although competition from Apple, Disney (DIS) and others is cropping up.
This group of stocks comprises more than 20% of the S&P 500’s market capitalization, making the gains on the index look larger than they’d be if the index were equal-weighted. Semiconductor stocks like Nvidia (NVDA) , up 53% year-to-date, have also contributed to continued growth boom this year.
Also contributing to the bearishness positioning found in Bank of America’s survey, the average investor is underweight cyclical sectors like materials, energy and industrials compared to historical portfolio allocations. Meanwhile, investors are holding more cash, bonds and healthcare stocks than usual. That’s a bearish bet on the economy.
It’s also important to note that growth stocks had long periods of outperformance in the bull market between 2009 and 2020 before the virus hit. Bank stocks had trouble with the yield curve and energy stocks got decimated by several new trends in energy, among other factors. So the fund manager survey may be indicative of near-term economic bearishness or it may indicate a structural change in the way investors allocate within their portfolios.
But on the bearish side of things, some do say the U.S. is in for a W-shaped recovery, meaning there will indeed be economic growth — not contraction in the second half — but that a second wave of virus infections will put the economy back into recession.
Not to give B-of-A too much credit here, but its fund manager survey points out that biggest fear in market is a second wave of coronavirus infections as states reopen, potentially too early. That’s likely the key keeping investors on the sidelines. Equity managers TheStreet has spoken with say that while the S&P 500 had one of its best April’s ever, they were marginal net buyers of stocks, not considerable buyers. A market in which most participants are marginal net buyers is one in which stocks will rise.
Bulls are indeed looking for a V-shaped recovery, which Morgan Stanley’s Head of U.S. Equity Strategy, Mike Wilson, is looking for as well. Wilson cites recent improvements in cyclical sector and asset class participation in the rally as a key indication. The Invesco KBW Bank ETF (KBWB) is up 9.3% since May 13, beating the S&P 500’s gain of about 4.8%. Small caps, which can be cyclical and volatile, are up 8.4% in that span.
Wilson does think there may a near-term pullback, as valuations stretch against mounting risks.
Here’s the point: even bulls say a near-term pullback is likely. The S&P 500 is just about 12.5% below its all-time-high, which it hit in February, pre-virus.