The debate of value versus growth is again rising.  As noted several times, the correlation between Treasury yields and the NASDAQ is the greatest since 1999 according to Bloomberg.  The NASDAQ underperformed in the first quarter as the Treasury market entered its first bear market since 1980.  Conversely the NASDAQ has outperformed recently given the nominal decline in yields.

Bloomberg quantified the number of years that growth has outperformed value…14 years.  Bloomberg also states that the last time value outperformed growth by the margin that it has thus far in 2021 was October 2000, right before the NASDAQ plunged about 80% and value remerging as the predominant theme for the proceeding seven years.

A major difference between today and 2000 is the massive concentration of wealth in a handful of names that had experienced strong earnings growth. Barclay’s writes the FAAMGs are trading at a 40% premium to the S & P 500, a lofty level given that as an aggregate the S & P 500 is trading around 33x earnings.

The word “transitory” has taken on great significance in so many dimensions.  Both growth and inflation are at levels not experienced in about 4 decades, the accepted reason is comparisons are against record low levels.

I nor do anyone else know what will occur tomorrow.  The Federal Reserve is viewed as both omnipotent and omniscient, a view that I find is oxymoronic given that its outlook has greatly missed the mark since at least 2009.  As widely known, the Fed did not anticipate today’s current growth or inflation rate.

Is inflation transitory?  It appears the central bank is extending the period that it defines “transitory” to 9-12 months versus 3-6 months.

The answer will dictate the performance of the various sectors of the financial markets.

Radically changing topics, the Senate Finance Chairman is considering reviving a proposal that would limit how much money can be shielded in retirement savings. His proposal is once a Roth account reaches $5 million it would prevent individuals from saving more monies in such a vehicle.

While the amount does sound lofty, it is yet another example as to how some in Congress is supporting an attack on savings.  Psychology 101 states once a forbidden or fearful behavior is acted upon, the odds of the same or similar behavior to occur again rises substantially and the scope or breadth of that behavior also rises.  In other words, there is a proverbial crack in the previous impregnable wall.

Commenting about yesterday’s market activity, Bloomberg remarked about the lack of breadth.  Only 48% of the S & P 500 is trading above their 50-day moving average, the lowest percentage since 1999 when the benchmark reached records.  Since 1990 there have been only two previous periods when this negative divergence (record high stocks accompanied by breadth below 50) occurred–December 1999 and June 1998.  One was at the onset of the implosion and the other was the LTCM fiasco.

Talk about the re-crowding of an already crowded trade.

What will happen today?

Last night the foreign markets were up.  London was up 0.13%, Paris down 01.6% and Frankfurt down 0.17%.  China was  up 1.16%, Japan up 0.66%  and Hang Seng up 1.40%.

The Dow should open flat.  Banks are advancing on the positive outcome of the Federal Reserve stress tests which will permit them to buy back stock and increase their dividend. The 10-year is off 1/32 to yield 1.49%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.