Just when the stock market seems like it’s starting to make sense, it has to go and unleash its inner Talking Heads.
We’re referring, of course, to Friday’s payrolls report, which was a massive disappointment. All week long, the Dow Jones Industrial Average had been outperforming the Nasdaq Composite. That suggested that investors had finally gotten behind the notion that the economy really is booming and were ready to reward value stocks, the market’s cheapest and the biggest beneficiary of that growth.
Then the jobs report hit. Just 266,000 jobs were added in April, well below economist forecasts for about a million, making it the biggest miss on record. What’s more, March’s number was reduced to 770,000 from 916,000. If the numbers are right, they suggest the U.S. economy isn’t nearly as strong as many observers suspect it is.
That was the bond market’s first reaction. The 10-year Treasury note yield fell to around 1.485%, a nearly 0.1 percentage point decline from where it had been trading. Futures on the Dow, the most economically sensitive major benchmark, slipped into the red, and Nasdaq futures were pointing to a gain of more than 1%, which made sense given it’s the least dependent on the economy for gains.
But then, soon after the market opened, the 10-year yield was close to unchanged on the day, while the Dow had gained 229.23 points, a sign that the market, at least, didn’t believe that the economy was stagnating the way the payrolls number suggested. By day’s end, the Nasdaq was up 0.9%, suggesting a lack of excitement following the early, knee-jerk reaction.
That continued a trend that had been going on all week: Nasdaq strength was used as a selling opportunity. And by the end of the week, it was impossible to disguise how badly growth stocks—those whose growth is expected to outpace the market’s—had performed. The Nasdaq fell 1.5% to 13,752.24, while the
Invesco S&P 500 Pure Growth
exchange-traded fund (ticker: RPG) fell 1.5% to $170.02. But for a real sense of the damage, look no further than the
ETF (ARKK)—home to richly valued speculative stocks like
(SQ)—which slumped 9.1% to $109.81 on the week. Compare that to a 1.2% rise to 4232.60 for the S&P 500 index and the Dow’s rise of 903 points, or 2.7%, to 34,777.76—record highs for both.
How’s that, you ask? Despite the payrolls shocker, the economy still looks set to expand strongly over the next couple of years, and that’s all value stocks need to beat growth. Since 1979, the U.S. economy has grown, on average, by 2.5% per quarter year over year, says Lori Calvasina, chief U.S. equity strategist at RBC Capital Markets. When gross-domestic-product growth has been below that level, growth stocks outperform, largely because they can continue growing even when there’s little growth to be had. When GDP growth is above 2.5%, however, value stocks outperform.
With GDP set to increase by 6.4% in 2021 and 4% in 2022, value’s run may only be getting started. “The stage is set for value to keep outperforming,” Calvasina says.
Economic growth is already filtering its way into expectations for earnings growth. The companies in the Russell 1000 Growth index are expected to grow earnings per share at a 24% clip over the next 12 months, according to Christopher Harvey, U.S. equity strategist at Wells Fargo Securities, while the ones in the Russell 1000 Value index are expected to grow earnings by 28%. It’s the first time in about a decade that value is expected to offer more growth than growth.
Yet growth stocks are still priced as if they’re the ones leading the race. The Russell 1000 Growth index was trading at 30 times forward earnings this past Thursday, a 56% premium to the Russell 1000 Value index’s 19.2 times, near a 20-year high, Harvey notes. Paying that kind of a premium might make sense if growth stocks were, you know, expected to grow faster than value. Not anymore.
“When growth is abundant, you don’t pay a premium for it,” Harvey says. Jobs disappointment or no jobs disappointment.
Tesla Takes a Dive
Sell in May and go away usually refers to the entire stock market. Right now it also applies to Tesla’s stock.
Tesla bulls might not like to hear it. But the stock looks stuck, and the next big catalyst to drive shares higher isn’t on the horizon. At $672.37, shares are down about 5% year to date and 21% over the past three months, lagging far behind the S&P 500 and Dow Jones Industrial Average. That isn’t great. Still, Tesla shares are up about 310% over the past 12 months.
After an epic rise, the stock has stalled. That is just what Tesla stock tends to do—rocket higher after major milestones, then do nothing for a while.
Tesla’s market capitalization bobbed between $2 billion and $3 billion for years after the company’s 2010 initial public offering. Then the Model S came out, showing that Tesla could deliver the luxury all-electric sedan people wanted. The stock’s market cap jumped to $20 billion in 2013.
A similar jump happened around the time the Model 3 came out in 2017, and again in 2019, when Tesla showed it could be profitable. The stock raced from about $50 to $900 over the following 16 months, bringing its market cap to $837 billion at its peak.
Investors are looking for the next catalyst. Bulls hope for more U.S. EV purchase incentives. Tesla’s driver-assistance feature—called Autopilot—could also be cleared in the Texas crash that generated bad PR recently. Those will help balance out recent concerns over emission credits, which Tesla earns for producing more than its fair share of zero-emission vehicles, after
(STLA) announced it would purchase fewer of them from Tesla.
Stellantis spent roughly $350 million on Tesla credits in 2020, a sizable chunk of Tesla’s $1.6 billion in credit sales that year.
“This is clearly a headwind,” says Wedbush analyst Dan Ives, though he doesn’t see a material impact for Tesla. “They lose some sources but gain others as more [auto makers] have to comply with regulations.”
True catalysts look further out in the distance. Tesla’s new German plant could be one. It represents capacity growth and improved vehicle quality because of new manufacturing processes and more-advanced batteries. Yet the facility isn’t due to come online until the beginning of 2022.
“They need something, and it’s the German plant,” Navellier & Associates Chief Investment Officer Louis Navellier tells Barron’s. “We anticipate the quality of the German Model 3 and Y will be really good.”
The biggest catalyst would be full self-driving cars. Tesla is working hard on its autonomous-driving technology, though CEO Elon Musk calls it the hardest challenge it has tackled to date. Progress is being made, but big revelations are likely to come at the end of 2021 at the earliest.
The catalyst deficit is also showing up in company fundamentals. Analysts had been raising their earnings forecasts for Tesla, but now they have slowed, according to Brian Rauscher, head of global portfolio strategy at Fundstrat. Between July and January, 2021 earnings estimates went from roughly $2.50 a share to about $4.10. Since then, they have barely budged. It’s a sign the current good news is reflected in the stock.
As spring turns to summer, take some time for a road trip. Reflect on the future of the auto industry at the beach. Just don’t expect a breakout for Tesla stock. That will have to wait until later.
Buying the Farm
Prices of corn, wheat, and other agricultural commodities have been soaring. Yet some agricultural stocks have not been keeping pace. That’s created a buying opportunity in shares of companies like
Corn prices are up 57% in 2021, while soybean and wheat are up 22% and 20%, respectively. That’s good news for farmers, who will earn more from their crops and can spend more to maximize output.
You wouldn’t know it from recent trading. Corteva (CTVA) and FMC (FMC), makers of crop inputs like pesticides, herbicides and seeds, reported earnings this past week. Corteva shares fell 4.2% the day it reported, while FMC dropped 3.6%. The earnings were fine—both companies beat—but neither company materially boosted full-year earnings guidance even though crop prices are up. That was a disappointment.
Investors shouldn’t fret. Normally, agricultural commodity prices are driven by supply, not demand, as is the case with most other commodities. Demand for food is usually very stable, but supply can fluctuate widely with the weather.
This time may be different. Supply is growing. But there is a new source of demand. China is importing vast amounts of corn, some 32 million metric tons in 2020 and 2021, almost as much as the country imported during the previous 20 years.
China’s population is eating more meat, which means more corn and soy for animal feed. That should give investors confidence commodity prices can remain elevated for the next couple of years. If that’s the case, ag stocks don’t look all that expensive.
(DE) and Corteva trade for about 21 times estimated 2021 earnings, in line with the S&P 500.
(AGC) and FMC trade at 16 and 15 times estimated 2022 earnings, respectively. Fertilizer producers
(NTR) trade at 19 and 15 times, respectively.
Those multiples probably won’t be going any higher, but investors don’t need them to. Expanding earnings are all that’s needed to drive their shares higher.