U.S. equity market returns generally have been on an upward course for more than eight years, surpassing the typical bull market run of 4.5 years. And although bond bears regularly forecast the end of the 35-year downward trend in U.S. government bond yields, rates still remain low, and bonds continue to churn out positive returns. In this issue of CIO Insights, American Century Investments’ chief investment officers discuss how this backdrop presents challenges to value-minded investors but also creates opportunities as we pursue our active, disciplined approach.
Room for Growth
The current U.S. equity bull market has been forging ahead, mostly unchecked, since early 2009. The Federal Reserve’s (Fed’s) late-2008 launch of quantitative easing helped set the stage for the broad-based stock market recovery from the global financial crisis, and stocks haven’t looked back much since.
Recently, growth-oriented stocks have generated particularly noteworthy performance—especially the stocks of a select group of technology sector companies. This robust performance has led to questions about the sustainability of the growth rally and speculation from some pundits that the market may be experiencing a growth stock bubble. We believe select growth stocks remain attractive, largely due to broad secular economic trends and company-specific factors we continue to identify through our disciplined research. This is particularly evident in the information technology and consumer discretionary sectors, where specific companies in the U.S., Europe, Japan and the emerging markets are transforming industries and experiencing gains in revenues and earnings.
In addition to acting on secular trends, we are focusing on inefficiencies in today’s stock market. Specifically, investor biases and behaviors continue to create pricing anomalies that we, as active managers committed to an objective and disciplined process, seek to exploit. Periods of market extremes often cause investors to act irrationally, and they may ignore certain relevant fundamental details in favor of less-meaningful data, historical trends, or market consensus thinking. Such behavior often causes securities to become mispriced or undervalued.
This dynamic has been playing out in the value stock universe. The extended performance disparity between growth and value stocks has largely been due to unprecedented events in the financials and energy sectors, which have caused value stocks to broadly fall out of favor among investors. As active managers, we continue to look beyond these anomalies to uncover mispriced securities of otherwise strong companies—an approach we believe is suited to building wealth over time.
Finding Value Among Bonds
The Fed has been in tightening mode for nearly two years, yet bond yields are still relatively low, and bond returns continue to climb higher against a backdrop of modest economic growth and low inflation. Given the extended period of positive bond market performance, valuations in many sectors appear elevated. Nevertheless, we’re relying on our active, opportunistic approach to uncover value throughout the U.S. and global fixed-income markets—all while maintaining our focus on quality, risk management and diversification.
Sticking to Our Strategy
Although the current climate is challenging, it’s not without opportunity. As active, engaged managers, we’re able to uncover and participate in those opportunities, while remaining true to our stated strategies and disciplined investment processes. We believe this approach is especially important—and beneficial to investors—during market extremes.
Generally, as interest rates rise, bond values will decline. The opposite is true when interest rates decline.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of G. David MacEwen and Victor Zhang and are no guarantee of the future performance of any American Century Investments portfolio.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.