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The market continues its impressive, if unusual, recovery since the lows experienced in March. The rebound has been driven by resilient growth stocks grinding toward higher and higher valuations. Although growth stocks have outperformed value equities for more than a decade now, the gap has become dramatic, and extends across geographies and cap sizes.

In this issue of Key Investment Perspectives, we look into why investors have flocked to growth stocks and examine the most popular narratives and arguments for growth over value.

Key Takeaways

  • The Federal Reserve: In support of its mandate to promote maximum employment, the Fed shifted its inflation target from 2% to 2% "on average." The move codifies a willingness by the Fed to tolerate an inflation rate higher than 2% for a period of time and implies the Fed would delay raising interest rates if inflation rises. This continues a pattern of dovish behavior by the Fed that’s proven a strong driver in the impressive recovery of equity prices since March.
  • An Unusual Recovery: Not only has the market recovered much faster than in the aftermath of comparable crises, but it’s also been much narrower in scope. The S&P 500 reached new record highs in August, but more than 50% of the stocks in the index still were down for the year. The top five stocks in the S&P 500 now account for 23% of the index, a record level of concentration.
  • Tactical Allocation: We increased our equity allocation over the summer to neutral to reflect improving economic trends and visibility around the impact of COVID-19. Within equities we continue to favor the U.S. vs. developed international markets and remain neutral regarding emerging markets. Within fixed income we prefer investment-grade corporate bonds over Treasuries.