GROWTH STOCKS STRUGGLE IN 2021
The economic cycle proceeds through three phases: Early Cycle (recovery and accelerating growth), Mid Cycle (slowing growth), and Late Cycle (stagnant or negative growth which can include a recession).
The Federal Reserve meeting on June 17th signaled the end of the recovery and the beginning of the Mid Cycle, blue chip stocks typically perform best during the Mid Cycle.
When markets transition from one phase to another volatility rises and there can be multiple -5% to -15% corrections as investors adjust to the change in dynamics. This past summer was choppy, in line with that transition.
Mid cycle stocks have largely been ignored during the recovery phase, and there are numerous examples of large blue chip companies consolidating sideways over the past 10 to 12 months. With the recovery phase largely complete, investors have been gravitating towards high quality blue chips and many have been breaking out of their consolidation patterns.
Our portfolios have been invested in blue chips this year due to their high quality balance sheets and dependable earnings streams (particularly because stock market valuations are at epic levels, across the board). It is expected that these companies will continue to break out and rally into year end, as investors continue to accumulate blue chips as we move further into the Mid Cycle.
On 07/28/2021 Jurrien Timmer, Director of Global Macro for Fidelity Management & Research wrote: “With leadership firmly back in the hands of the secular growers (blue chips), breadth has narrowed significantly”. This means that returns will tend to be concentrated in these industry dominating companies.
Reference his article: “What the market is signaling now. Despite narrowing price gains, stocks remain attractive as earnings soar”.
The following charts outline the past year for high quality growth stocks:
NASDAQ Growth Index 7 month consolidation, -13% drawdown, breakout in July.
NYSE Fang Plus Index (Facebook, Apple, Amazon, Netflix, Google, Microsoft) sideways consolidation beginning 01/01/2021, -16% drawdowns, recent breakout.
Note: past performance is not an indication of future results and expectations might not materialize. This information is provided for educational purposes only and due to its’ narrow focus is not deemed to be investment advice.
LPL 1-05190039
DEFINITIONS
Nasdaq Composite Index - is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities.
NYSE FAANG+ Index - An index that provides exposure to 10 of today’s highly-traded tech giants. The index launched on 09/26/2017, prior performance (09/19/2014 to 09/25/2017) is based upon backtested index calculations. Gross total return variants are shown for all of the indices in the chart. The NYSE FANG+™ Index is an equal-weighted index.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. This memorandum is being made available for educational purposes only and should not be used for any other purpose.
The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Investing involves risks including possible loss of principal. Past performance does not guarantee future results. Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing. Wherever there is the potential for profit there is also the possibility of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein and may be subject to change without notice. Neither Highcroft, Inc., Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein.
To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft Investment Advisors, Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.
Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources. The economic forecasts set forth in this material may not develop as predicted.
Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.
The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed, and the accuracy and completeness of such information has not been independently verified.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results. Investing in the index would require investors purchase an investment product, which would involve fees and expenses.
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