The stock market waters have been getting rougher of late. Nobody knows if the 10-year U.S. Treasury will continue surging and how much longer the growthiest tech stocks will continue to stumble. Regardless, I don’t think we need to see swelling bond yields to get a continued rotation out of growth and into value. The U.S. 10-year bond remained steady at around 1.4% on Tuesday, yet the tech-heavy NASDAQ 100 led the downward charge once again, plunging 1.7%, as the value- and resource-heavy TSX Index surged 0.7%.
There’s no question that a sustained growth-to-value rotation was a long time coming. And I think such a “return to value” could continue being the major theme throughout 2021. Last year, it paid to neglect valuation and chase the growthiest tech stocks out there. In numerous pieces published over the past few months, I’ve warned investors that such a strategy was unlikely to work in the new year and that those who refused to take profits would stand to get hurt.
Growth stocks to value plays: The major theme of 2021?
Now, I’m not recommending that you dump all your growth stocks. Rather, I’d encourage you to take a little bit of profit off your biggest growth winners of 2020. Many of the growthiest stocks like Shopify have more than doubled on the year.
Can hot stocks like Shopify continue defying the laws of gravity moving forward? Possibly. With COVID-19 headwinds (or pandemic tailwinds in the case of Shopify) likely to fade into year-end, though, I don’t think it makes as much sense to pay a premium price tag on such growth stocks that have been riding high on coronavirus tailwinds.
Moreover, rising bond yields have caused some investors to turn their backs on the growth darlings. Even if the 10-year bond remains comfortably below the 2% mark, I still think the late-February growth sell-off could act as a wake-up call for investors to pay more attention to valuations.
Across the board, valuations are high. But they deserve to be high, given the low-rate environment we find ourselves in. It’s the “bubbly” areas of the high-growth tech scene that I believe has yet to correct. Electric vehicle (EV) kingpin Tesla, cryptocurrencies like Bitcoin, the much-promoted SPACs, red-hot recent IPOs and WallStreetBets’s meme stocks (or tokens like Dogecoin) are all looking quite bubbly today. And they could have much more room to fall should momentum chasers finally deem it’s time to ring the register and take profits while they still exist.
What happens when the bubbly parts of the market crash?
A correction or crash in such severe pockets of severe overvaluation could drag down the broader NASDAQ or the entire stock market, but it doesn’t have to. Value could steer clear of the damage, and I’m inclined to think it will, regardless of when or how the speculative frenzy in other areas of the market end.
As such, I’d urge Foolish investors to stay the course and resist the urge to chase stocks that have doubled up many times over in recent months.
When you take the pockets of overvaluation (EVs, cryptocurrencies, SPACs, IPOs, meme stocks, etc.) out of the equation, the stock market isn’t looking as frothy as some pundits on TV are touting. As such, I’d stick with value and dirt-cheap cyclicals ahead of a post-pandemic expansionary phase. The growth stocks have already run, and I think value plays are ready to play catch-up to their tech-savvy counterparts.