SHIFT IN LEADERSHIP

12.4.202O

Research Brief Presented by
Cameron Dees, Research Analyst

KEY TAKEAWAYS

Large-Cap Growth stocks have outperformed their peers over the past four years

Leadership has started to shift since the release of positive vaccine data

Expect Small-Cap/Value stocks to outperform as economy recovers

WHY DIVERSIFY?

Diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. Think of the proverb “Don’t put all your eggs in one basket.” At Allegiant Private Advisors, we believe that diversification is one of the most important determinants of reaching long-term financial goals.

Diversification, in its simplest form, is achieved by investing in different asset classes (i.e. stocks, bonds, commodities). Portfolio risk can also be lowered by diversifying within an asset class. In the equity market this means owning companies of various size, age, industry, and location.

Over long-time horizons, the benefits of diversification are obvious. However, there are times when market conditions cause investors to question the benefits of a diversified portfolio. Case in point would be the last four years.

Large-Cap Growth stocks have gained 103% since the end of 2016, while Large-Cap Value and Small-Cap stocks have gained just 23% (Figure 1).

Figure 1


The Beginning of a Rotation

On November 9th, Pfizer announced strong results from its Phase III COVID-19 vaccine trial. The 90% effectiveness of the vaccine was all the market needed to confirm that a return to economic growth and normalcy is coming sooner rather than later.

Since the positive release, we have seen a shift in market leadership (Figure 2). Large-Cap Growth stocks are now lagging Large-Cap Value and Small-Cap stocks. The big question now is, will it continue?

Figure 2


Where Do We Go from Here?

We believe the economy will transition from “bad and improving” to “good and improving” next year (Figure 3). Prospects for additional fiscal support by year-end have increased in recent days. A small targeted stimulus package would help keep the economy afloat in the short-term. As vaccine distribution becomes more widespread in the first half of 2021, look for the economic recovery to accelerate.

Historically, in the year after a recession ends, both Value and Small-Cap stocks have been outperformers (Figure 4). If these historical tendencies repeat in 2021, Allegiant portfolios should benefit. Most client portfolios have slight tilts towards Small-Cap and Value given their attractive relative valuations and long-term mean reversion potential.

Figure 3

Figure 4


Short-Term Risk

The intermediate-term outlook is supportive of Small-Cap/Value stocks, but the recent surge in Covid-19 cases threatens the rotation in the short-term. With hospitalizations at record levels (Figure 5), the economic recovery has stalled. Large-Cap Growth stocks could reassert their dominance if lockdowns are reintroduced and/or Congress fails to agree to additional stimulus.

Figure 5


Conclusion

Investors have been waiting for the right environment to rotate into Small-Cap and Value stocks after a multi-year period of dominance from Mega-Cap Growth stocks. Expectations for additional fiscal support in the short-term and above-trend economic growth next year support a continuation of the current rotation.

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