Institutional Investing / Macro Minutes

Macro Minutes: Why Growth in 2021

In this month’s edition of Macro Minutes, Capital Markets Innovation Research Analyst Dan Mathews discusses Fisher Investments’ views on global growth and value stocks for the year ahead.

Key Points

  • The magnitude of last year’s drawdown was bear-like, but was quick, recovering within months, similar to a standard correction.
  • When 10Y minus 3M US Treasury yield spreads are greater than 2%, value stocks frequently outperform. When spreads are below 2%, growth stocks tend to outperform. Currently, the Treasury spread is around 1.4%, which is too narrow for value outperformance historically.
  • Market breadth has narrowed instead of resetting, a late cycle condition.



Title screen appears, "Why Growth in 2021” underneath the title is the picture on the presenter, Dan Mathews.

An image of a man appears on the left corner of the Screen Wearing a Navy Suit.

He Begins to speak.

A Banner identifies him as Dan Mathews, Fisher Investments Capital Markets Innovation Research Analyst on behalf of Fisher investments and its affiliates.


Dan Mathews: Hi everyone. My name is Dan Matthews and I'm a research analyst with Fisher's Capital Markets Innovation Team, where we help the IPC develop the ideas that I'm about to share with you. This edition of Macro Minutes covers Fisher's views on global growth and value stocks over the next year or so. Our current preference for growth is a core driver within the portfolios we manage, and stems from our most differentiated viewpoint that markets are in the late stages of along cycle, not a new cycle as most assume.


On the screen a chart appears, the chart is titled “2020 Acted More Like a Correction”

The chart is showing the S&P 500 Cumulative Return Change Since Market Peak over the days.


Dan Mathews: Slide one provides some perspective to 2020’s drawdown. It shows median returns during corrections and bear markets compared to market movement over the last year. You'll notice that the magnitude of last year's drawdown was certainly bear like, but it's also clear that the drawdown was quick recovering within months, more closely aligned with a standard correction.

Dan Mathews: With last year's headlines blaring bear market, it's no wonder that most assume we are in a new cycle. Yet if the drawdown was closer in effect to a correction than has a new cycle with new trends really begun, our data says no. Instead, pre-virus trends like growth outperformance continue, catching most investors by surprise.


On the screen, 4 new charts appear, the title is “Consensus and Positioning of Fund Managers.”


Dan Mathews: The data in this second slide comes from bank of America's Popular Fund Manager Survey and covers a large cross section of active managers over many years. The first chart, in the upper left quadrant shows where fund managers think we are in the cycle. January's results show that 73% of active managers think we are early in the cycle, the highest reading since 2010.

Dan Mathews: That insight helps explain why investors Favor classic early cycle plays like small cap and value stocks. Take a look at the two charts. On the right side, small cap and value stocks are now more popular than at any point since the survey began. The fourth chart on the bottom left shows similar all-time highs and expectations for a steeper yield curve. Now, what does the yield curve have to do with growth in value stocks? Historically, it is a fundamental driver, helping indicate which will outperform over the next year, as we'll see in slide three.


On the screen a new chart appears, the chart is titled “Narrow Yield Curve Favors Growth”


Dan Mathews: Here we compare the ten years minus three-month US. Treasury yield spread and the relative total return of value versus growth over the next year. Gray bars show the starting yield spread and average value outperformance. The green line shows how frequently value outperformed when spreads are greater than 2%. Value stocks frequently outperform when spreads are below 2%. Growth tends to outperform. Now, that may seem coincidental, but there are real fundamental reasons supporting this relationship. One of the simplest is value indices are overweight banks and banks make more money when spreads are wide. Their business model is to borrow at lower short-term rates, lend at higher long-term rates and collect the difference.

Dan Mathews: When the spread between long- and short-term rates is wide, banks make more money and value in the seas do well, pretty simple, although interestingly, the relationship goes far deeper than bank earnings. For example, wide spreads incentivize banks to lend more so they can make more. More loans means more economic activity, a tailwind for economically sensitive value stocks, which are often smaller, with thinner margins and more leverage. When lending increases, these firms get the growth capital they need to take advantage of accelerating economies, boosting relative returns. That's the early cycle environment that most fund managers expect today.

Dan Mathews: However, the treasury spread, while rising recently, is only around 1.4%, historically too narrow for value outperformance and, as the senior loan officer surveys show, too narrow to entice bankers to increase lending. As a result, the simple fundamental driver should continue to benefit growth and catch most managers by surprise.


On the screen a new chart appears, the chart is titled “Market Breadth Has Narrowed Instead of Resetting”


Dan Mathews: Slide four provides more evidence that we are late in the cycle, but here we look at a more technical indicator. To compare with the fundamental and sentiment data shown in prior slides, this chart looks at global market breadth, or the percent of stocks beating the MSCI World Index over the past year. Included on the chart is Shading for the last three bear markets.

Dan Mathews: Normally in a bear, breadth rises from its late cycle depths to early cycle peaks. You can see that reset during the popping of the tech bubble and during the financial crisis. You don't see that in 2020.Instead, you see falling breadth, a late cycle condition more reminiscent of corrections like in 1998 and 2018.Without a full reset to flush out the excesses of the prior cycle, trends tend to keep their momentum.


On the screen a new chart appears, the chart is titled” Persistent Growth Dominance”


Dan Mathews: Slide five highlights one of those trends showing growth's cumulative outperformance since the beginning of 2020. Many think this trend ended in Q four as vaccine news shifted focus to a post virus future. But that ignores the underlying growth dominance we saw before, COVID during, and since. This chart takes the long view by ignoring just two vaccine news days that you may recall from early November, when Pfizer announced 98% vaccine efficacy.

Dan Mathews: Removing those two days gives us a preview into the future, when investors no longer focus on lockdowns or vaccines, and instead focus on the underlying fundamentals supporting growth, bringing everything together, many expect value to outperform in a new cycle. Those rising expectations created the counter trend we saw last quarter, but those expectations will be hard to overcome given negative fundamentals like an arrow yield spread and weak lending.

Dan Mathews: When you couple those elevated expectations and negative fundamentals, you get the conditions for classic late cycle growth momentum to persist.


On the screen, a new chart appears, the chart is titled “Classic Late Cycle Growth Gains”


Dan Mathews: Slide six helps explain what I mean by late cycle growth momentum. This chart shows average value of performance through each US Market cycle dating back to the Great Depression, almost 100 years. In the middle of the chart, you see the green line plummeting into the cycle peak, denoted by100% on the bottom axis of the chart. This is what we were talking about when we say growth dominates late cycle this is what we are observing in markets today. This is the classic trend that we think continues until the end of the cycle, surprising most fund managers.


A white screen appears with the following written text” Thank you for watching. If you'd like to learn more about our views, please reach out to your relationship manager or Email”


Dan Mathews: And that's it. Thank you for watching this edition of Macro Minutes. If you would like to learn more, please reach out to your relationship manager.


Dan Mathews finished talking and A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.



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