SSGA-SPDR: Return to the recovery trade

SSGA-SPDR: Return to the recovery trade

September 30, 2021

Equity
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US equity indices are increasingly concentrated in growth stocks, which have led a decade-long asset price expansion. As US businesses continue to re-open, the value trade may well come into favour again, as it was at the start of 2021. Dividend expectations and enhanced income provide investors the opportunity to diversify equity exposure and stay invested with an eye to protecting gains.

In the years since the US Federal Reserve (Fed) returned to its dovish, easy-money, low interest rate environment, US investors have seen growth stocks benefit. This has in part led to the concentration of the S&P 500 to levels not seen since the 1970s (Figure 1) and has helped investors who are long the popular US equity benchmark.

As we enter Q4 2021, with the Fed expected to announce plans to dial back the asset purchases critical to keeping yields low, investors are evaluating their continued appetite to remain long the 'winners' of easy money.

Figure 1: Cumulative Weight of Top 5 Names in the S&P 500

figure1-dividends

The current economic sentiment still provides a supportive case for equity investors. Surveys of Consumer Confidence and Retail Sales have recovered their pre-pandemic trends (Figure 2), as consumers look to emerge from pandemic-related lockdowns and return to normal.

We see signs of this confidence in the expectations for dividends and analyst expectations and dividend forecasts are both remarkably positive at the moment.

Figure 2: Consumer Indicators Recover Pre-Pandemic Trend

figure2-dividends

 SSGA-SPDR believes that the first half of 2021 was just the beginning and the recovery trade will continue through the end of the year.

The advantage that growth stocks experience from ultra-low interest rates may be reduced if yields continue to rise as inflation picks up. We expect the gap between growth and value to continue to close.

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