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Checking Back in on Interest Rates and Value in the Stock Market

CAMS Weekly View from the Corner – Week ending 5/21/21

May 24, 2021

In a previous edition back in mid-March we shared the relationship that was unfolding of higher market based interest rates in the Treasury bond market and how that was impacting the stock market in terms of what stock market participants were turning their attention to relative to value oriented companies compared to growth oriented companies. Generally speaking the growth oriented approach is to focus on stocks of companies whose earnings are growing rapidly and are expected to grow even faster.  With current and expected growth these companies have much higher valuation levels awarded to them as market participants are willing to pay up for these companies with the expectation that extraordinary growth will reward them as the company brings these high expectations to fruition over time. Value on the other hand are companies who have low valuation levels and in many cases seemingly have been forgotten by market participants as “old and boring going nowhere” companies relative to exciting growth companies and their rapidly evolving storylines.  The value type stock many times has a history of consistent revenues and earnings with relatively much slower growth rates with seemingly little prospects for growth rates to pick up notably.  The above descriptions are meant as broad generalizations of each style approach. Treasury Bond Market The bond market, as a central determinant of market based interest rates, plays a key role for all markets. As bonds consistently drop in price their interest rate (yield) rises and in so doing leave a trail of consistently rising interest rates.  The aforementioned, highly valued growth stocks tend to struggle when interest rates are rising consistently and rapidly.  With this you can see how the bond market can play out in the stock market relative to which is more in favor – growth or value.

Click For Larger View:

Click For Larger View: The two charts above offer a visual of our general narrative.  Both charts are eighteen months in time and per the red lines both speak to the same general trends – up, sideways and then down.  Also note, to the right side of the down arrow in both charts is their behavior since our mid-March edition.  Both have been trendless which further emphasizes their established relationship. The top chart is the Treasury bond market’s (7-10 year Maturities) price trend.  The right side highlights the established downtrend and now more recently its sideways movement. The second chart is a ratio chart of growth vs. value stocks.  When the line is rising it means growth stocks are outperforming value stocks.  Conversely, when the line is trending down then value is outperforming growth. Viewing the two together we can see that as goes the top chart so goes the bottom chart. More specifically, the top chart (Treasury bond market) leads the way and then the growth vs. value relationship reacts with a bit of a lag.  (Again, via the second chart, when the line is trending down this means value is outperforming growth.) All Eyes Remain On the Treasury Bond Market Consistently rising interest rates, via the bond market, can be a nemesis for growth stocks in particular as well as the stock market generally.  If interest rates get out-of-hand from here the stock market will be challenged.  If they merely gently rise then we can expect further outperformance from value oriented stocks compared to growth stocks.  All eyes remain on the Treasury bond market for insight on forward behavior for the stock market at large as well as various dynamics within the stock market such as the above growth vs. value observation. I wish you well… 

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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