Chart of the week

Style-agnostic approach important in fast-changing markets

With markets moving fast and furious, our chart looks at dispersions across factors and why style agnosticism may be more important than ever.

April 23, 2021 | 2 minute read

Total returns from market low (March 18, 2020–April 21, 2021)

Source: Bloomberg, FS Investments, as of April 21, 2021. The S&P 500 Equal Weight Index includes the same constituents as the S&P 500, but each company is allocated a fixed weight, or 0.2% of the index total. High-growth stocks are represented by the top 10% of 1-year forward sales growth within the S&P 500 Growth Index. COVID-recovery stocks are represented by the bottom 10% of stocks in the S&P 500 Growth Index based on free cash flow yield.

  • A year ago, we started the first actual cycle reset the market has seen in over a decade. The blistering pace of the recovery and the swift changes in equity leadership over the last year have been both impressive and unusual.
  • The previous market cycle, for example, began in the wake of the global financial crisis and lasted for about a decade. It was largely characterized by slow economic growth, low inflation, falling interest rates and steady market leadership by U.S. large-cap growth stocks.
  • Since the pandemic began, however, we have seen the fastest-ever market decline followed by the speediest recovery, beginning a new market cycle.
  • The chart shows returns since the recovery began in March 2020. As it highlights, the stocks that were most beaten down during the COVID-driven sell-off have also seen the greatest recovery since.1 This is not entirely unusual given that stocks tend to revert to the mean.
  • What is unusual, however, is the strong simultaneous performance of high-growth stocks (that is, those with high price-to-earnings valuations). We don’t typically see this type of performance from the “most expensive” stocks at the start of a new cycle.
  • How is this cycle different? Persistently low interest rates have driven down the cost of capital, serving as fuel for growth stocks’ performance. Yet these same high-growth stocks saw a rapid reversal as interest rates jumped in February and March, highlighting the impact that rate sensitivity is currently having on equity investors.
  • While the S&P 500 has performed well since the market bottom in 2020,1 the significant variance between the performance of market factors illustrates the potential benefits of taking a balanced, style-agnostic approach in 2021 in order to capture returns in fast-moving markets.

  • Bloomberg, FS Investments, as of March 31, 2021. High-growth stocks are represented by the top 10% of 1-year forward sales growth within the S&P 500 Growth Index. COVID-recovery stocks are represented by the bottom 10% of stocks in the S&P 500 Growth Index based on free cash flow yield.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

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