As U.S. equities continue to seek retribution from a challenging fourth quarter in 2018, there have been some underlying trends that are starting to surface in terms of relative value: a penchant for large cap and growth equities."
“Concerns about growth prospects, as portrayed by the longer-term interest rate market, impacted cyclical sectors, value stocks, and small caps over the month of March, but the market has also taken into the account the balancing act that comes with lower rates, especially the Federal Funds Rate,” David Mazza, Managing Director, Head of Product at Direxion Investments, wrote in Direxion’s latest Relative Weight Outlook commentary.
Can these trends sustain themselves given the economic challenges ahead?
Large Caps, Growth Rise Despite Potential Headwinds
Despite signs of a global economic slowdown, figureheads like Federal Reserve Vice Chairman Richard Clarida are throwing their support behind the U.S. economy, saying it has room to grow. A decade following a punishing financial crisis, Clarida said “the current economic expansion almost certainly will become the longest on record.”
The Fed vice chair’s comments come amid the IMF cutting its global growth forecast to the lowest level since the financial crisis, citing the impact of tariffs and a weak outlook for most developed markets. According to the IMF, the world economy will grow at a 3.3 percent pace, which is 0.2 percent lower versus the initial forecast in January.
Furthermore, the global volume of trade in goods and services will increase 3.4 percent in 2019, which represents a drop from the 3.8 percent gain last year. The IMF, however, did mention that recent policy implementations like the U.S. Federal Reserve keeping interest rates steady are positive signs moving forward.
Domestically, Wall Street analysts are expecting a less-than-stellar earnings season for the first quarter as big banks like J.P. Morgan and Bank of America are scheduled to kick off reporting on Friday. Investors are looking at a 4.3 percent year-over-year reduction in earnings growth, according to FactSet estimates.
Should those estimates hold up, it would represent the first profit reduction for the S&P 500 since the second quarter of 2016. With analysts expecting a decline in earnings, the focus falls on corporate guidance for the rest of the year, which could help temper any investor fears.
Furthermore, the resurgence of growth has been apparent thus far in 2019 after a flight to safer value plays towards the end of 2018. This trend could reflect a broader theme of investors still willing to take on risks in order to reap the benefits of gains in growth-oriented equities.
“Growth shows promise, relative to value stocks, and that spread widened for the fourth straight month,” Mazza noted.
ETFs to Track the Trends
For investors looking for continued upside in large cap equities over small caps, the Direxion Russell Large Over Small Cap ETF (RWLS) offers them the ability to benefit not only from large cap equities potentially performing well, but from their outperformance compared to their small cap brethren.
Conversely, if investors believe that small cap equities will outperform large cap equities, the Direxion Russell Small Over Large Cap ETF (RWSL) provides a means to not only see small cap stocks perform well, but a way to capitalize on their outperformance versus their large cap brethren.
Investors may feel it’s time for value to overtake growth-oriented sectors. With that said, investors can play the Direxion Russell 1000 Growth Over Value ETF (RWGV) and the Direxion Russell 1000 Value Over Growth ETF (RWVG).
For investors looking for continued upside in growth-oriented equities over value-oriented equities, RWGV offers them the ability to benefit not only from growth opportunities potentially performing well, but from their outperformance compared to value.
Conversely, if investors believe that value-oriented equities will outperform growth-oriented equities, RWVG provides a means to not only see value opportunities perform well, but as a way to capitalize on their outperformance compared to growth.