The Flow of Fast Rivers. There has been a shift during this cycle toward growth investing and away from the once popular Benjamin Graham style of value investing. What is the difference between growth and value approaches to investing?

Value investing seeks to find companies where the current stock price allows for a significant margin of safety against future events. Even if a worst-case scenario were to unfold, there is a still a chance to make money in the investment, if purchased at the right price.

Alternatively, growth investing seeks to find innovative companies positioned to capture marketplace trends as they develop, expand, and entrench within society—hence their exposure to fast rivers. Growth stocks carry high expectations- but these expectations can be eclipsed by the sheer size of the market and potential rewards for companies that figure out how to capitalize.

While value investing seeks to buy $1 of earnings for $0.50, growth investing seeks to buy $1 in earnings for $5 in hope the $1 of earnings rapidly grows to $50. Investment gains have been disproportionately rewarded to these “secular winners,” who have provided an oasis for growth against the backdrop of slowing growth and a global recession.

growth vs value

Timelines to watch. The coming weeks will be pivotal in the Covid pandemic as its economic impact continues to unfold and the necessity for more government spending becomes a new focal point. As states reopen and the US economy tries to restart, consider the pending hard stop of bridge subsidies and assistance programs (from Hedgeye):

  • June/July = The first and second rounds of PPP loan disbursements expire. 
  • July 15th = Tax filing deadline (liquidity drain).
  • July 31st = end of Enhanced Unemployment Benefits. 
  • October 31st = Expiration of Forbearance programs.  Approximately 6% of loans are now delinquent and roughly 8.8% (approximately 4.7 million loans) of loans are in Forbearance. (Almost 5 million households are currently not making mortgage payments.)

China. President Trump offered harsh words towards China but little action in his press conference Friday afternoon. This comes on the heels of weeks of escalating tensions and a growing list of grievances on both sides. According to Evercore ISI’s weekly investor survey, Covid fears are subsiding while Sino-American tensions continue to rise:

ISI poll 0529

Fed’s Toolbox. We’ve addressed the Fed’s policy tools and current views against implementing negative policy rates in past weekly updates. Now there is talk of another option for the Fed, yield curve control (or YCC). YCC is generally seen as a tool to keep borrowing costs low by purchasing/selling Treasury securities to maintain a desired level and shape of the yield curve (purchases funded through additional QE). Dallas Fed President Robert Kaplan told MNI he's more inclined to further monetary supports like yield curve control and committing to run inflation above 2%, to support an economic recovery that will take well into 2022. There is no formal word yet from the Fed Chairman on the Committee’s stance on YCC.

Stress Points in Credit: As Schwab’s Liz Ann Sonders pointed out this week, "in May alone, 27 firms reporting at least $50 million in liabilities filed for bankruptcy (highest since 2009), there have been 98 filings YTD (also highest since 2009, which saw 142 filings in the first 4 months of that year).” According to S&P Global's base-case forecast, “the U.S. high-yield corporate default rate will rise to 12.5% by March 2021 from 3.5% in March 2020. Oaktree’s Howard Marks expects worse, "We are in the worst economic environment ever. [Despite the Fed,] I think we'll still have a very substantial distress episode. We may have 20% defaults in high yield bonds."

Happy Unofficial Birthday, 5/29s. Originally started in 1988 as a way for Michigan residents to lock in or “hedge” the rising costs of higher education, 529s have since morphed primarily into tax-advantaged investment vehicles with no direct link to the future costs of higher education. 529s have received several legislative overhauls, the most notable change coming from the Tax Cuts and Jobs Act of 2017 which expanded the use of funds beyond post-secondary education to include K-12 education. Given their automated investment options and tax-free treatment for qualified withdrawals, 529s are now the leading vehicle to save for college costs. According to information from the Federal Reserve, 529 assets totaled $371bn as of March of this year.

I will close here for the week. Have a great weekend.