Growth Stocks Regain the Lead as Investors Embrace a Dovish Fed

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Most of 2021 has focused on value stocks as the economy reopening from coronavirus, but last week investors returned to growth.

The S&P 500 rose 0.4 percent between Friday, June 4, and Friday, June 11. The Nasdaq-100 climbed 1.2 percent, its biggest outperformance of the S&P 500 since the beginning of the quarter. Cboe’s volatility index, the VIX, also closed below 16 for the first time since February 2020.

Investors seem to be shifting back to the Nasdaq-100 and growth stocks for a few reasons. One was the Food & Drug Administration’s unexpected approval of Biogen’s (BIIB) Alzheimer’s drug, which could signal more lenient decisions in the future. Another was the drop in interest rates as the economy struggles to rehire workers displaced by the coronavirus pandemic. Investors even shrugged off a higher-than-expected inflation report. That suggests sentiment has changed sharply from earlier in the year, when financials and industrials led.

The inability of politicians in Washington to pass a large infrastructure bill has also hurt economically sensitive stocks.

Next, growth stocks like Apple (AAPL) and Tesla (TSLA) have mostly led the market since early 2017. Many of the big names like AAPL, Microsoft (MSFT) and Alphabet (GOOGL) also reported strong results last earnings season.

Nasdaq-100, daily chart, with 50-day moving average and relative strength vs. S&P 500 index.

Is Inflation a Risk?

Consumer prices rose 0.6 percent in May, ahead of the 0.4 percent estimate. While that may sound bearish for stocks, two potential positives emerged from the inflation report:

  • Certain categories with dramatic increases in April, like used cars and transportation, slowed last month. That suggests some of the distortions and bottlenecks caused by coronavirus are already starting to ease.
  • Items like apparel and new cars rose more sharply. That suggests companies have pricing power for items being sold now, potentially good news for profit margins in coming quarters.
Biggest Gainers in the S&P 500 Last Week
Biogen (BIIB)+39%
Eli Lilly (LLY)+11%
NRG Energy (NRG)+10%
Enphase Energy (ENPH)+9.2%
Illumina (ILMN)+8.4%

A separate government report also showed a record 9.3 million job openings. If all those positions were filled, it would push total employment well above pre-pandemic levels.

Taken together, the news was consistent with so-called “Goldilocks conditions.” Inflation isn’t too hot and growth isn’t too cold. Interest rates don’t need to go up yet because inflation pressures will ease. The Federal Reserve will probably reiterate that view at its meeting this week.

The market’s already scaling back expectations for rate hikes, according to CME’s FedWatch Tool. Its calculation shows only a 4 percent chance of interest rates rising this year, less than half the odds in mid-May.

Biotech, Software Lead

Perhaps the most noteworthy thing about last week was the strength in biotechnology, software and solar energy stocks. These are the kind of companies that benefited from last year’s pandemic and have struggled since November. Their improving price action, combined with falling interest rates and weakness in industrials, may suggest investors are returning to high-multiple growth stocks.

Biggest Decliners in the S&P 500 Last Week
OGN (OGN)-13%
Dish Network (DISH)-11%
Caterpillar (CAT)-9.6%
Vertex Pharmaceuticals (VRTX)-8.1%
United Rentals (URI)-8.1%

Last week also saw declines in financials, materials and homebuilders.

This week brings a Fed meeting and a handful of other events.

Retail sales and the producer-price index are due tomorrow, along with Oracle (ORCL) earnings.

Wednesday brings housing starts in the morning and the Fed meeting at 2pm E.T. Chairman Jerome Powell will hold a press conference 30 minutes after the meeting.

Initial jobless claims are scheduled for Thursday. Adobe (ADBE) reports earnings as well.

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