As Wall Street debates the timing of the Federal Reserve's stimulus cuts, investors have already shifted their positions, targeting high-income companies that can withstand slower economic growth.
According to data compiled by Goldman Sachs Group Inc. and Bloomberg, S&P 500 companies with strong balance sheet have outperformed those with weaker financial position for three consecutive months, the longest stretch since May 2020. This is a reversal from early 2021, when stocks of the companies with shattered finances flourished as the economy reopened, outpacing top firms by the most on record.
The change in investor sentiment came along with a slowdown in economic growth amid resurging virus cases. Hiring data on Friday was far below the estimates, the latest in a string of weak data, landing just as extended US unemployment benefits are due to expire in just a few weeks. Besides, the Fed considers rolling back its monetary stimulus while the pandemic continues. Such a recipe for slower growth could leave some low-cap companies vulnerable, increasing demand for the companies with the strongest financial records.
Strategists at John Hancock Investment Management say, "What we've been positioned for is the end of peak growth, peak stimulus, peak accommodative policy." "It is companies that can avoid margin pressures as input costs rise, and all of that leads us to companies with great balance sheets and strong fundamentals," specialists add.
The rotation was seen in the five days ahead of the holiday weekend when investors piled into the high-tech Nasdaq 100 Index, pushing it up by 1.4%, while the S&P 500 was lagging behind, having climbed by 0.6%. It hit a record high on Thursday before falling on weak employment data.
ETF investors have poured over $1 billion in companies last week that will benefit from the continued surge in economic activity, suggesting they are betting that the recovery will not begin until the end of the year.
At the same time, investors were clearly nervous about the impact of the Delta variant and the Fed's tapering plans, given that stocks are close to all-time highs. Traders are looking for protection against a market downturn and invest in quality firms.
According to JJ Kinahan, chief market strategist at TD Ameritrade, "Long-term good balance sheets tend to outperform bad balance sheets. Right now, investors are worried about a sell-off as stocks are at their all-time highs. So, they might be thinking, "OK, if we do have a sell-off, where do I want to be longer-term?" So, they may go down too, they may not go down as much. And they have a better opportunity to come back in a quicker fashion," the analyst explained.
