Momentum Investors Will Be Buying Energy and Materials in a Year

The global economy is changing, yet many investors seem to have static portfolios. The ongoing popularity of the so-called “secular growers” despite the stocks’ meaningful underperformance as the economy has started to change indicates investors generally have not understood the powerful secular macroeconomic forces fueling those stocks. Whereas most investors have focused on companies’ supposed unique business models, the reality is macro trends were the predominant catalyst for longer-term outperformance.

Secular stories change as the macroeconomy changes, but investors typically are hesitant to welcome change and tend to cling to yesterday’s story. Today, for example, investors seem to downplay the ongoing change in leadership as simply a short-lived value cycle in hopes the old leadership returns.

History shows changes in market leadership tend to last longer than investors expect and if the recent cyclical/value/small cap leadership does indeed last, momentum investors could be buying energy, materials, and other value/cyclical investments in a year or so.

Growth Companies vs. Growth Stocks

In a 1956 edition of the Harvard Business Review, Peter Bernstein

(no relation) wrote a landmark essay called “Growth Companies vs. Growth Stocks” in which he pointed out investors mistakenly use the two terms interchangeably. He outlined there are significant differences between growth companies and growth stocks.

Growth stocks are those stocks with superior growth rates because the companies successfully respond to something going on in the macroeconomy. Bernstein suggested, if many companies in the same industry or sector were outperforming then they likely are growth stocks as the entire industry or sector was being propelled by economic events. In other words, the macroeconomic backdrop fuels a growth stock’s success. The example he used, given

that it was 1956, was steel stocks. The economic environment was fueling the performance of the entire steel industry leading investors to characterize steel stocks as growth, but the macroeconomy and not the companies themselves was primarily responsible for the success of these companies.