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.