Growth Stocks are Facing “Critical Price Level” Vs. Value

Stocks are flat today as the “war” between value and growth continues. Dow shares hit a new all-time high while the tech-heavy Nasdaq Composite slumped. After years of growth stock domination, value’s making a comeback.

But is it going to continue? Analysts have long predicted a rotation into value. And though value has outperformed in recent months, it has yet to truly run away like growth did for much of the last decade.

In the coming days, however, that could all change if growth stocks – and tech shares in particular – fall much further.

As represented by the IWF/IWD, which plots growth stocks (IWF) against value (IWD), you can see that value is overachieving growth. When the chart goes up, that means growth stocks are winning. When it goes down, value is experiencing superior performance.

And with a broader market correction looming, investors are jumping ship from growth stocks. The dismal April jobs report (released Friday) initially bolstered tech bulls. US payrolls fell well short of the consensus estimate (266k jobs added vs. 1 million expected), signaling to many that the Fed would remain dovish.

In turn, that would keep rates low – something growth stocks depend upon to achieve, well, growth. But today, the market’s sobering up. Soaring commodities have investors worried about inflation, as do rising wages. Corporations are hiking salaries and hourly pay across the board in an attempt to compete with generous unemployment provisions.

Now, investors are anticipating a tapering of the Fed’s bond-buying program. If that happens, rates will go up and growth stocks will go down. That does not necessarily imply that value names will rise, though. They might just not fall as much as their growth counterparts in a market rout.

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“The tech price action is especially frustrating for many as the thought was Friday would elicit a more sustainable rebound in the space,” explained Adam Crisafulli, founder of Vital Knowledge, in a note.

“Instead, the group is seeing aggressive selling and accumulating technical damage as prices breach key levels.”

After all, earnings season is finished. Stunning quarterly results were met with a tepid response last week as bulls lost their fervor. Copper prices rocketed higher, too, which usually only happens when the economy is in (or about to enter) dire straits.

Meanwhile, meme-currency Dogecoin erupted alongside Ethereum. Investors are favoring digital currencies and commodities in a world where fiat’s being abused by central banks.

And who can blame them? It’s especially understandable now that so many reopening hopes have already been priced into equities.

“We’re watching expectations vs reality with the market now well priced for reopening. On a cumulative basis, retail sales are above where they would have been on pre-Covid trends – suggesting some expectations risk around the pent up demand narrative,” said Mike Wilson, chief US equity strategist at Morgan Stanley.

“The labor market has less slack than is typical at this point in the cycle. We recommend moving up the quality curve and adding more defensive balance as the market shifts toward mid-cycle leadership.”

Key CPI inflation data will be revealed on Wednesday to boot. If it comes in too hot, the Fed may be prompted to take action.

And should that happen, expect the “tech wreck” to continue while value overachieves.

Even if that results in a slower value descent as all sectors (minus commodities and commodity-linked stocks) tumble.

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