Wednesday's Market Minute: Taking Stock At New Highs

For the most part, it seems pretty clear what’s going on in the market the past few months. Bond markets calmed as supply-chain inflation risks ebbed, and the Nasdaq found its footing as yields retreated lower again. It’s largely the same equation as always: the Fed puts investor worries at ease, and stock valuations rise. Earnings growth is playing a bigger role this time than at other recent highs (and some valuations are lower), but the momentary glimpse of a value-stock and cyclical-driven equity market was largely contained to the last quarter of last year and the first quarter of this one.

Look at the relative strength of value vs growth to see how the market progressed since the light at the end of the COVID tunnel began to emerge. Growth stocks’ leadership to value peaked on September 1 last year. Value stocks’ leadership peaked on March 8 this year. From the March 2020 bottom to the growth-stock apex on September 1, the S&P 500 gained an average 0.5% a day. When value stocks led the market between September 2020 and March 2021, the S&P’s ascent slowed dramatically to 0.06% a day. As growth stocks reasserted themselves the past three months, the market’s added an average 0.16% a day. We’re still making highs, but things are moving more slowly.

This latest growth push since value’s leadership peaked in March is not nearly as powerful as in February when the FAANG suite was still cranking out records and the ARKK fund was soaring. Nvidia and Google are flying today, but Tesla looks lost at sea, and FAANG remains divided. The spring high in bond yields didn’t match the high in value-stock dominance precisely, but the two were close (March 30 vs. March 8), and the 10-year yield is 10 basis points lower since. If the risk to the stock market in April was a spike in yields, it stands to reason it is still this way today, with correlations between stocks and bonds still high. So there are really only two things that have changed: the market’s confidence that inflation will be short-lived and growth stocks’ ability to power gains at last year’s blistering pace. That means that any surprises from the Fed can still rock the boat, and the boat has taken on some water since earlier in the year.