Growth Stocks: In search of value

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Additional fiscal stimulus in the works, earnings season and political tension between the US and China. As we head full steam into August, a lot of things are expected in the markets this month. Stability is not one of them.

5 hot topics that investors should keep an eye on

1. Pressure continues to mount on governing authorities to ward off a second wave of COVID-19 casualties. Having eased measures in May and June, multiple US states and countries like South Africa, Mexico, and Brazil have continued to register a record number of daily new cases throughout July.

Here is the current global distribution (with China making up less than 1% of cases).
2. The S&P 500 (SPX) has made a miraculous recovery following the market bottom on March 23rd, as it stands less than 5% below its all-time highs.

But has it really? Excluding the top 5 constituents would solidify its ‘meh’ performance since the beginning of the year.

S&P 500 stocks YTD

3. One of the main reasons for this: The index is very top-heavy. In fact, it is more concentrated in its top holdings than ever before.

Microsoft, Apple, Amazon, Alphabet, and Facebook make up nearly 25% of the index. What does this mean? Investing in broad market index funds are not providing the diversification investors assume they are. To put this in context – if the top five stocks were to fall by 10%, the bottom 100 of the blue-chip club would need to rise by 90% just to keep the index flat.
4. Old but Gold.

Political tensions, debasement fears and indefinite money printing have repelled investors from the world’s reserve currency (the US Dollar). Combined with uncertainties around economies fully re-opening, the price of gold edged past $2,000/OZ at the beginning of August for the first time ever.

YTD performance of Gold (red) vs Silver (blue)

Silver is the new gold. At least for now.

Since we mentioned the Gold/Silver ratio our latest article here, silver has increased 35% while gold has lagged behind, having risen 10%. With the ratio reaching a record high in March, it has since subsided to more acceptable levels, with the average in the 21st century ranging from 50:1 to 70:1.

One of the implications of this is investor confidence in an imminent recovery. Silver is used in nearly every major industry, from electronics and medical applications to batteries and solar panels. From cell phones to self-heating windshields in your SUV, silver is everywhere, whether you see it or not.
5. Earnings season. Netflix (NFLX), Facebook (FB), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL/GOOG) all took center stage to report earnings in the final weeks of July.

Amazon, Apple, Facebook and Google account for 35% of the total weighting of the Nasdaq 100. Add in Microsoft (MSFT) and Tesla (TSLA) – and that’s another 14%. Thus, those six tech companies account for basically half of the Nasdaq’s total weighting.

With all eyes on the FAANG earnings, even if a couple of them had missed estimates, it likely would have been a tipping point – putting an abrupt halt to this euphemistic market rally.

Value VS Growth Stocks

Growth stocks refer to companies that are expected to increase their earnings or revenues at a faster rate than the rest of the market. Value stocks, on the flipside, are underpriced or unglamorous companies that can be picked up at a discount, only to reveal value as time goes on.

Yet value stocks are the talk of yesteryear as tech, consumer discretionary and communications blockbusters have hijacked the spotlight. And when talking about equity outperformance, US equities have surpassed their overseas counterparts. In fact, Europe’s largest asset manager, Amundi Asset Management, has released research on why they expect American stocks to continue their dominance1.

P/E ratios, debt-to-equity figures, and dividend yields are all but an afterthought as stocks are trading at a gazillion times their earnings figures and are still perpetuated as ‘buys.’

The FAAMG stocks trade at 31×2021 EPS compared with 18x for the remainder of the S&P 500
What gives? With the global focus on finding a vaccine, attention has shifted to digital companies immune to physical impediments. Investors are seeking investments that can not only weather business cycles but work through global pandemics without losing their stride. These are companies that have proven they can grow, yet the ceiling is nowhere in sight.

During the longest bull run in history (2009-2020), the divergence has only grown between S&P 500 Growth and S&P 500 Value stocks. A rising tide is supposed to lift all boats, but growth stocks have put the gap at a 25-year high ahead of value stocks. The outperformance is evident in the chart below, which portrays total returns since 1995. The value fund’s largest holdings include stocks like BRK.B, VZ, JNJ, WMT, and BAC – while the growth fund includes the likes of MSFT, AAPL, AMZN, FB, and GOOG.

Growth investing is less sensitive to factors like interest rates and inflation, relying instead on innovation and competitive advantage. This explains its continued success over more than two decades, as the divide rises to nearly 450%.

Total returns from growth vs value stocks

Reasons to expect the trend to continue

During typical recessions, laid-off workers do not expect to get their jobs back. As of May 2020, almost 80% of workers in the US felt they would be re-hired by their employers (compared to historical sentiment being around ~15%).

Expectations of future employment leads to spending, and spending leads to revenues – which keeps businesses afloat. But before consumers spend, they need to have saved. Global media did its best to convince us that Armageddon was around the corner – and it worked. In anticipation of a worldwide economic slowdown from COVID-19, personal savings rates climbed into the low teens in March and spiked to over 30% in April of 2020. The reasons were twofold:

i. Government stimulus, which directly injected cash into consumers’ accounts
ii. Lockdowns, which prevented people from spending (to an extent).

According to the National Bureau of Economic Research (NBER), the recession officially began in February. When will it end? They define the conclusion of a recession in part as the trough in job losses. Data shows that both hiring and retail sales improved significantly in May after plummeting just a month earlier. If the trend continues, this recession might be in the rearview mirror sooner than we think – and also the shortest on record.

US Retail Sales
(Month-over-Month % change)

US Unemployment Rate
(in millions)

The VIX hints at a return to normal

The CBOE VIX Volatility Index measures the expectation of stock market volatility over the next 30 days implied by S&P 500 (SPX) index options. Having reverted to levels close to those during the US presidential election in 2016, here’s what they imply:

• VIX Index ~16 implies 1% daily SPX moves
• VIX Index ~32 implies 2% daily SPX moves
• VIX Index ~48 implies 3% daily SPX moves
• VIX Index ~64 implies 4% daily SPX moves

The high-water mark for the VIX Index in March on a closing basis was slightly above 80, which meant 1-month SPX options were priced based on expected 5% daily moves. Current VIX Index levels, around 24, means 1-month SPX options are pricing expected daily moves of around 1.5%. To put this in context – the average daily swing over forty years has been approximately 1.4%. Moreover, short term (10-day) realized volatility for the S&P 500 has fallen to the lowest levels since February 21st, to around 11.90%. Markets are not only growing accustomed to, but essentially embracing the ‘new normal.’ 5-year chart showing the VIX Index (closing) With 252 day moving average


Declining market breadth and a possible bull trap scenario from concentration in the FAANGs should keep investors on their toes. The NASDAQ 100 (NDX) is up nearly 24% and at its zenith – but has fallen off from June 20 levels. The S&P 500 (SPX) has nearly recovered all losses suffered from the pandemic – but cannot break through February highs.

With less than 100 days until the US election, markets are bound to hit a few rough patches in the upcoming months. The good news is that investors can capitalize on these market shifts, both the upside and downside, through Leverage Shares ETPs. With exposures of 3x, 2x, and -1x, market participants can express their convictions on leading US stocks in multiple currencies – all without the hassle of a margin account.

Your capital is at risk if you invest. You could lose all your investment.

Please see the full risk warning at

Education Series: Single-Stock ETPs

Authored by

Julian Manoilov

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