Simeon Hyman, CFA, Global Investment Strategist and a panel of senior leaders at ProShares discuss how the past economic landscape has set us up for the economic landscape of today, and the market outlook for the rest of 2021, including: growth vs. value stocks, inflation concerns, dividend sustainability, thematic investing, and the fixed-income market.
Earlier in 2021, economists predicted a cyclical recovery, with outperformance from value and rising interest rates. As 2021 has progressed, this vision has gotten more cloudy. Hyman noticed that as the year has progressed, “the almost no-brainer [of value over growth] that people thought at the beginning of the year is thrown a little bit into question, because growth’s not so expensive and value’s not that cheap, so the choice is a little different.”
Addressing inflation concerns, Hyman references a capacity utilization chart. “There’s been less of a focus on [capacity utilization] over the last couple decades as service and technology have become bigger and bigger pieces of the economy. But what that means is that high levels of capacity utilization are less likely to create inflation,” says Hyman.
The trigger point for high inflation is about 80%, and the economy right now rests at 75% capacity utilization, which provides assurance that any near-term rising inflation will be transitory. Kirwan identifies the importance of dividend sustainability as a key objective. S&P 500 Dividend Aristocrats, which are higher quality stocks, provided an income stream at a time when the S&P Index provided none. I
n 2020, the yield on cost for S&P 500 Dividend Aristocrats is just over 8%, while the yield on cost for 10-Year Treasuries is just above 2%. When interest rates rose in Q1 of 2021, the most expensive stocks fared the worst. Conversely, the least expensive deciles within the IT sector performed quite well. So, Kirwan suggests to investors that to combat concerns regarding the direction of rates and how that’ll manifest itself in a portfolio, they should look to invest in reasonably priced tech stocks. Helfstein emphasizes the rise of thematic investing, which harnesses the growth occurring in sectors like ecommerce, healthcare, and anything related to working from home.
“When we talk about thematic investing, for us the power is in the narrative. It’s about being able to construct investments about the future of the economy, rather than traditional investment frameworks,” says Helfstein.
Helfstein also points out that NASDAQ, a growth-oriented index, is positively correlated with rising rates. So, in a rising rate environment, growth outcomes improve. Moreover, with 8,5000 people visiting e-commerce sites globally with every second, the growth opportunity in the thematic space is exponential. On the other hand, fixed-income opportunities are facing considerable interest rate risk. Negative fixed-income returns are due to a sharp steepening of the yield curve in the first quarter, and inflation-adjusted treasury yields have far to go before becoming positive.
“If the Fed is saying that interest rates are going to rise with respect to the Fed Funds Rate, we should be looking at different strategies to mitigate interest rate risk, and that’s more important than ever because the duration of the US Aggregate Bond Market is at all time highs,” says Bush.
ProShares is a division of the ProFunds Group that provides specialized ETFs with combined assets under management of around 58 billion. It’s a small asset management company that offers unique funds tracking various indices and asset classes.
To learn more, catch the replay of ProShare’s Webcast: Mid-Year Market Outlook: Identifying Opportunities as Economy Reopens. ProShares’ 2021 mid-year outlook addresses key questions on investors’ minds, including:
- Is the current bout of inflation truly transitory?
- Where might interest rates go from here?
- Is there an alternative to value stocks?
- How to stay invested in technology and growth stocks?
- What investment themes could prevail in a reshaped future?