There is a sizable divergence between the performance of the S&P 500 today, up about 1%, and the Russell 1000 Growth index, which is down slightly. The S&P 500 has a greater exposure to value stocks than the Russell growth index. Today’s difference, may largely be a function of the out performance of historically value oriented industries, including financials and cyclical areas like materials and energy. Technology is also lagging, which is a bigger concentration among many classically oriented growth portfolios.
As we’ve said in recent updates, we expect that as the recovery gains steam, the out performance of early cyclicals will likely broaden to include late cyclicals. This may imply that classically value orientated styles may have an opportunity to catch up to their growth brethren in the coming months. Until April, growth had sharply been outperforming its value oriented peers. In managing our portfolio, we tend to care less about strict definitions of value and growth and instead like to consider what should generate the best portfolio growth given a variety of inputs, including the economic cycle and trends in innovation.
The biggest news of the day was the ADP employment report which showed a 491k drop in payrolls for April, substantially below expectations of 650k and a three month average of 685k. These numbers represent an important inflection point in trend and may bode well for Friday’s regular employment report. On the earnings front, tech heavyweight Cisco Systems reports earnings tonight.
The results of the Treasury department’s long awaited bank stress tests will also be released tomorrow. There have been several rumors about the results of these tests over the last three days and it wouldn’t surprise me in the least if officials leaked different scenarios to see how the markets would respond. In general, the responses have been favorable for stock prices even when appearing pretty dire. For instance, it is rumored today that BofA may have to raise $34 billion in additional funds and in spite of that news, the stock is up 16%! One might conclude that the markets are looking beyond worst case scenarios, perhaps rendering the results of these tests irrelevant.
Don’t forget, Sunday is Mother’s Day.
