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By Greg Woodhams, CFA - June 1, 2018
Markets opened higher today after the release of the Bureau of Labor Statistics "Employment Situation" report. The 0.1 percent increase in year over year average hourly earnings matched the higher-end consensus, increasing from 2.6 percent to 2.7 percent.
The wage growth seen in this report should diminish concerns that the Fed is moving too slowly to restrain inflation. Still, we believe we are transitioning to a late cycle, rising rate economy, characterized by less accommodative monetary policy, lower labor productivity and rising costs amid high levels of capacity utilization.
The rising rate environment should bring us back to more normal levels of market volatility like those seen prior to the Great Financial Crisis of 2008 - ‘09. This volatility gives investors a chance to trade opportunistically, provided they know where to look.
There are two types of growth stocks: cyclical and secular. Cyclical growth refers to companies whose earnings growth is closely tied to the economic cycle; demand for their products or services expands and contracts along with the economy. Secular growth refers to companies in a strong competitive position that have the potential to grow their earnings regardless of where we are in the economic cycle.
In general, stocks with cyclical growth tend to outperform late in the recession or in the early stages of the economic cycle. During those periods, investors may expect the economy to grow but are less certain about nearer-term earnings potential of individual companies.
As the economic cycle matures, investors are reluctant to pay up for earnings that may be not be sustained if the economy slows or falls into recession. And, since it's difficult to predict with accuracy when the recession will start, the performance of cyclical stocks can begin to lag long before it arrives.
Companies exhibiting secular growth are positioned to benefit from underlying competitive advantages that are not dependent on the economic cycle. Therefore, strong secular growth companies may outperform later in the cycle due to expectations their earnings growth can continue even as the economy slows.
The Economic Cycle
Identifying secular growth requires fundamental research and an understanding of a company's competitive position relative to its peers. Our U.S. growth team relies on their experience and bottom-up research to identify companies with sustainable competitive advantages. We also monitor our portfolio's factor exposures to help avoid taking on unintended risks. Ultimately, our process seeks to ensure that we'll be rewarded for stock selection and exposure to growth.
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The wage growth seen in the latest Bureau of Labor Statistics report should diminish concerns that the Fed is moving too slowly to restrain inflation. Still, we believe we are transitioning to a late cycle, rising rate economy.
June 01, 2018
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
The opinions expressed are those of American Century Investments (or the portfolio manager) 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.