Vaccines and Rising Interest Rates

Over the past five years, if your portfolio has been overweight growth stocks you have likely been very pleased. During that time, the Russell 1000 Growth index has more than doubled the return of the Value index. The Growth Index’s forward P/E ratio has increased to

30.9 from 16.7, while the Value Index forward P/E has increased to 15.5

from14.4. In otherwords, most of the gains in growth occurred from investor’s willingness to pay more for the same earnings not from the growth of earnings. Many experts have been predicting a rotation from growth stocks to value stocks for a while, but growth has still been outperforming at least until this year. Two key factors could cause a rotation from growth to value stocks. When the pandemic occurred and people were forced to stay isolated, technology stocks which were either unaffected or even helped by the pandemic surged and conventional stocks like travel, hospitality and traditional retail suffered.

Now that there are three vaccines that are available and the return to some normalcy looks to be within reach, these battered sectors are beginning to rebound. Moreover, with the threat of inflation, interest rates surged since the beginning of the year as the 10-year treasury yield climbed from .91 to 1.49. Higher interest rates hurt growth stocks the most because growing companies rely on cheap capital to finance their growth. Are the conditions finally ripe for value stocks to dominate? The vaccine optimism and the rising interest rates are providing a tailwind to value stocks. For February, the Russell 1000 Growth ETF was up

2.5% (IWF). However, the Russell

1000 Value ETF (IWN) was up

13.3. If you have been making lots of money by overweighting growth stocks, you are either very smart or very aggressive. It may be time to rebalance your portfolio to reduce exposure to growth and increase exposure to value. The last time technology surged in the late 1990’s and early 2000’s it eventually crashed and investors who had tech heavy portfolios suffered greatly.

Singer Wealth Advisors is an SEC registered investment advisory firm. Past performance does not guarantee future results. This material is for information purposes only and does not consider the investment objectives, financial situation, or particular needs of any individual.