The Week Ahead: Underlying Rotation from Value to Growth on Recession Fears

 | Jul 17, 2022 21:18

  • In the last month, technology stocks fell relative to value stocks at half the rate of the year's first five months
  • Yields signal further equity downside
  • Steepening inverted yield signal recession
  • Dollar due a correction within an uptrend
  • Gold could fall much lower, as could oil. while BTC remains aimless

    • Increasing signs of recessions may be reflected in the undercurrent shifting from value to growth stocks.

    This year, I have been monitoring and demonstrating a sector rotation between growth and value stocks.

    Here is one number that demonstrates how economically sensitive stocks outperformed technology shares. The Nasdaq 100 has lost 29.6% this year, while the Dow Jones Industrial Average declined by 15.7%, slightly over half that amount.

    However, I identified a stark reversal in June.

    Here is a table with both indexes' performance going back each month cumulatively.

    NDX VS Dow

    • 6M - 29.5% VS -15.3% (NDX falls 49.2% more)
    • 5M - 23% VS -12.4% (46% more)
    • 4M -19.2% VS -9.2% (47.9% more)
    • 3M (NYSE:MMM) -22.5% VS -11.2% (50.2%)
    • 2M - 10.6% VS -6.7% (46.8% more)
    • 1M -9% VS -6.7% (25.6% more)

    Note that the NDX lost about double that of the Dow in each accumulative month. However, in the last month, that comparative loss halved to just a quarter.

    What does this mean? While a single month can always be an anomaly, it's noteworthy that all the previous months this year were wholly consistent. This anomaly occurs when fears of a recession escalate, with more voices joining the chorus.

    Value stocks began outperforming when rates began rising, as they are sensitive to the economic cycle. However, if a recession is what we're looking at, I expect investors to shift from value to growth.

    As I've demonstrated, so far it's just one month, but if I'm right, we'll see a more significant, apparent shift back to the known, big names as stocks fall harder.

    We'll better gauge the market when companies release results next week. Specifically, look to see how badly inflation impacted growth. This week, Goldman Sachs (NYSE:GS), Johnson & Johnson (NYSE:JNJ), and Tesla (NASDAQ:TSLA) will release results.

    So far, the cyclical sectors hitched a ride on the soaring energy prices. Still, energy and other commodities - also sensitive to the economy - have been falling in recent weeks because of the same concern: recession will end demand.

    Meanwhile, bulls could rationalize increasing risk after Citigroup Inc (NYSE:C) beat expectations, pushing the S&P 500 banks index (SPXBK) 5.75% higher.

    h2 Bonds/h2

    Treasuries fell for the week, the third time in four weeks, as investors hoard safe haven assets.

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