“Stocks have been trading this year like we were in a recession,” said Christian Preussner, a member of JP Morgan AM’s US equity team, speaking at a conference in London on Tuesday. According to Preussner, this has opened up specific opportunities in both growth and value stocks as recessionary fears are now fading away.
While there has by no means been a market slump associated with previous pre-recession periods, safe haven-thinking has made investors flock to quality, dividend-paying stocks this year while some financial and tech stocks have been sold off. There hasn’t been any meaningful underperformance of growth stocks though as you can see in the graph below, suggesting there are only selective opportunity to be found.
This means that not just cyclical stocks, but also high beta names such as Google are now relatively cheap, while dividend-paying, consumer-oriented stocks are at their most expensive relative to the rest of the market since 2008.
“That Google is down 9% year-to-date while it has normalised earnings growth of 15%, while [consumer staple company] Clorox is up 9% with earnings growth of 3% and a dividend pay-out ratio of 65%, gives you an idea how irrational the market has been,” said Preussner.
A portfolio comprised of such ‘irrationally cheap’ growth stocks combined with “cyclical value companies” such as financials and energy stocks would be well-positioned to outperform if recessionary fears recede further over the coming months, according to Preussner.