Statistically speaking, inflation remains subdued, though there was evidence of rising prices in July. Historically, value stocks perform well in inflationary environments, but this time around could be different with the growth factor benefiting from rising prices.
That could shine a light on the already strong SPDR Portfolio S&P 500 Growth ETF (NYSEArca: SPYG).
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms.
“Overweighting value, mid-caps and small caps may be the play, depending on your investment thesis for inflation alongside a full-blown recovery,” said Matthew Bartolini, head of SPDR Americas research, in a recent note. “However, our current recovery is marked by transcendent and generation-defining socioeconomic shifts taking place as we adjust to a new digitally connected but physically separate world.”
Solid Performance by SPYG
SPYG, which tracks the S&P 500 Growth Index, and rival growth ETFs can actually perform well late in the business cycle. Investors can still enhance their portfolios as the bull market extends with growth-oriented stocks that continue to perform despite the recent bouts of volatility. SPYG is higher by 25.58% year-to-date.
Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.
“Those shifts are likely to continue as our daily routines change, and they are likely to be driven by firms within certain sectors (Technology, Consumer Discretionary, and Communication Services) that are well represented in traditional growth exposures,” notes Bartolini. “Therefore, the historical uplift of inflation for value relative to growth may not be as strong as a result, leading to growth likely still outpacing value in the near term.”
The $9.51 billion SPYG allocates over 41% of its weight to tech stocks and about 28% of its combined weight to the consumer discretionary and communication services sectors.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.