Curious about Zevenbergen Capital’s investment perspective? Check out an excerpt from our quarterly client letter for our thoughts on 1Q21.
Zevenbergen Capital
1Q21 Equity Review & Perspective
Revenge Economy: As the world pondered whether 1Q21 would mark the beginning of a return to “normal”, worries about long-dormant inflation (prompted by massive stimulus) suddenly gripped financial markets. Sales of U.S. Treasuries accelerated, pushing yields sharply higher and sparking a flight from high-growth stocks, especially those believed to be losing a pandemic edge as the economy reopens. Value stocks (with fortunes closely linked to an economic turnaround) beat growth by the widest margin in two decades. As sweatpants, screens and microwaves replaced shopping, travel and restaurants, U.S. consumers saved nearly $1.5 trillion over the past year. With consumer confidence soaring on increased vaccinations and a fresh round of government stimulus, revenge spending is surging, boosting beneficiaries of the reflation trade. After enjoying a year in the sun, the rotation to cyclicals 1Q21 punctured investor devotion to high growth. The selloff in high growth could be considered a healthy reset. Yet, it is hard to observe the dichotomy between bullish management commentary/significant investment for the future and bearish stock price action without seeing opportunity. From a thematic perspective, the digital transformation is accelerating, technology’s addressable markets/dollars are expanding, and a recovery should only provide a tailwind.
At a certain point in the wee hours, it’s both late and early: For those who have been up all night, dawn is the signal things have gone far enough – or maybe too far. Among early risers, sunrise is a fresh start, offering a chance to get things done. Given the unprecedented gains in U.S. stocks over the past year (and a twelve-year secular bull market), investors with a cynical view have been trying in vain to predict when stock prices (especially growth) would start falling in earnest. The rapid rise in interest rates provided a subterfuge for selling, but in reality, some of the strongest periods of market performance have coincided with rising interest rates over the past few decades. (As much as higher rates are perceived threats, they are largely a function of earlier/stronger than expected economic recovery.) While there is no perfect historical comparison that can be used to lay out a road map for the future, we are reminded of a lesson learned from the pandemic: the world is rapidly changing. We are witnessing the dawn of a second wave of digital transformation sweeping many companies and industries, the key to future resilience and growth. The bigger risk may be overestimating the significance of negatives and underestimating the magnitude of positives.