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Value stocks and growth stocks have recently created angst for investors. Value investing reflects an entrenched, losing momentum and the growth style increasingly appears like a bubble in search of a bust. This isn’t exactly a new trend—growth has been besting value for much of the last 15 years, but it has accelerated mightily since year-end, escalating concerns among both value and growth investors.

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Although the stock market’s VIX Volatility Index is back below 30 and continues to moderate from its surge in March, the Economy’s VIX Volatility Index is just beginning to explode! Over the last ten years, the average annualized quarterly growth in real GDP was 2.1%.

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Should this morning’s payroll-employment report cause stock investors to tremble? Probably not.

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From its March 23rd low to its recent high, the S&P 500 surged by almost 45%! Is the speed and size of its rally too much, too fast?

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Many believe the stock market rally during this pandemic is nothing more than a sugar high orchestrated by the Federal Reserve. Liquidity trends have always been important for the financial markets, and undoubtedly, the outsized policy-push by monetary officials has played a significant role in the market’s recent success.

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No big theme this week. Just half a dozen “one-offs!”

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Company earnings are currently collapsing but the coming year’s consensus profit expectations are poised to lift. Several indicators that have historically been highly correlated with improvement in profit forecasts have recently turned higher and the backdrop of massive policy stimulus is supportive for upgraded outlooks.

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As economic activities restart around the country, bond yields have also begun to climb. Last week, the 10-year U.S. Treasury yield rose by about 25 basis points, to its highest level since March 19th, marking only the second time since yields collapsed that they showed any sign of leaving the “sub-1%” area.

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Despite several issues of importance—national riots, an upcoming presidential election, Chinese relations, and an ongoing pandemic—the stock market is primarily focused on a single thing: the restart of U.S. and global economic activities. There is a worldwide, synchronized economic bounce afoot. Because of the unprecedented magnitude of the recent Covid-19 economic collapse (can it really get much worse?), economic news seems poised for a period of improvement.

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Compared to historical norms, for much of the last 30 years valuations in the U.S. stock market have remained persistently high. Only rarely has it been considered cheap and many investors have purchased stocks that, by conventional metrics, were either uncomfortably or absurdly expensive.

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Things are moving fast! Attitudes and expectations are changing. On the health front. On the economic front. And, in the financial markets. Here are a few “Conjectures?”

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Many believe it will take years to fully recover from Covid-19. Indeed, over the weekend, U.S. Federal Reserve chairman Jerome Powell suggested that although the economy will eventually recover, the process could stretch through until at least the end of next year and ultimately depends on the development of a vaccine.  

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The attempt to re-open parts of the U.S. economy amidst the ongoing Covid-19 crisis is either Red, Blue, or Purple! Using data from an employment tracking tool utilized by 100,000+ local businesses across the United States, the accompanying chart illustrates the speed and depth of the decline in hours worked and its recent slow recovery among traditional Republican, Democratic, and Swing states.

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Growth stocks have been outperforming for much of the last decade, particularly in recent years, and amazingly so since year-end. However, as the charts here illustrate, it is not so much that growth stocks are winning as it is “Growth!” 

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Economic policies have long been a potent force for both the economy and the financial markets. Despite being unsure and worried about how the Covid-19 crisis will yet play out, investors are also currently fearful of ignoring the old adage “Don’t Fight the Fed.” 

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It is always challenging to judge value, particularly during recessions when earnings power temporarily (one hopes?) contracts. The difficulty has been magnified in the current situation because, like economic data in general, earnings are in freefall! 

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Domestic, large capitalization, and growth have dominated stock market leadership for much of the last decade. During this stretch, investors (author included) have repeatedly attempted to exploit “undervalued and out-of-favor” segments of the stock market, only to be proved premature. 

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Is there any way to judge when U.S. economic reports may finally bottom? Obviously, it depends on what happens with the virus. If it continues to burn hot or simply lingers longer than expected, keeping “stay-at-home” orders in place, could economic data prove bottomless? 

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For the second time in the last 30 years, “growth” has dominated leadership within the stock market. After significant outperformance during the 1990s’ dot-com era, the growth style has again substantially outpaced since the start of the last recovery (Chart 1).

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Earnings, like everything in the economy, are in freefall. Finance textbooks would argue this paints a bleak future for the stock market, but that isn't always the case. 

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